What is the cost of a foreclosure?
I get a lot of questions posed to me about short sale and foreclosures. An interesting one was posed to me recently. “How much will a foreclosure cost me?”
I had to really think about this question. Sure the standard answer about the difference in being able to obtain a loan in the future with Fannie Mae being 2 years vs. 5 years and the FICO score dropping by up to 250 points came to mind. However, I was thinking that question was asking for a quantifiable number. How could I quantify the cost of a foreclosure?
I spoke with my loan broker and decided to see what the actual cost would be by comparing someone obtaining a loan pre-foreclosure and then post-foreclosure.
Let us assume an individual has a FICO score of 750 and wants to buy a home for $500,000 with 20% down; so he would be borrowing $400,000. By running the FICO score through the Fannie Mae guidelines, this individual can obtain a 30 year fixed loan at 4.735 % and have a monthly mortgage payment of $1,997 as of 7/15/2010.
Let’s assume that same individual had gone trough a foreclosure and had taken a 250 point hit on his FICO score. What would the “cost difference” be for him if he wanted to obtain a loan to buy a house today?
First, any individual with less than a FICO score of 620 cannot qualify to borrow from traditional lenders; the only option available to such a person would be the hard money arena or private lenders.
Private lenders require down payments of 20% , but more like 30-40% . They are also short term loans, so you would only be able to borrow for 5 years or less, you would have to make other arrangements after that point or build up your FICO to the point where you would be able to qualify for a traditional loan. But for easy comparison’s sake, we will ignore those two important facts, since there is no other alternative funding method. Let’s assume an individual is able to qualify for a loan of $400,000 after a foreclosure.
After checking with one of her private money lenders, my loan broker came back and told me a private money lender would charge 10% to lend $400,000. The monthly payment on that loan would be $3,510!
How much will a foreclosure cost? About $1,510 per month, by my calculations.
Please don’t write to me, pointing out all the errors in my unscientific reasoning. This was a simplistic exercise trying to somehow quantify the damage to visualize the loss a person may suffer.
