In Announcement SEL-2010-05, Fannie Mae updated several policies regarding the future eligibility of borrowers to obtain a new mortgage loan after experiencing a preforeclosure event (preforeclosure sale, short sale, or deed-in-lieu of foreclosure).
The “waiting period” – the amount of time that must elapse after the preforeclosure event – is changing and may be dependent on the loan-to-value (LTV) ratio for the transaction and whether extenuating circumstances contributed to the borrower’s financial hardship (for example, loss of employment). In addition, Fannie Mae is updating the requirements for determining that borrowers have re-established their credit after a significant derogatory credit event.
***Note: The terms “short sale” and “preforeclosure sale” both referenced in the Announcement have the same meaning – the sale of a property in lieu of a foreclosure, resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer.***
Waiting Period After a Preforeclosure Sale, Short Sale, or Deed-in-Lieu of Foreclosure
Fannie Mae is changing the required waiting period for a borrower to be eligible for a mortgage loan after a preforeclosure event. The waiting period commences on the completion date of the preforeclosure event, and may vary based on the maximum allowable LTV ratios.
|Preforeclosure Event||Current Waiting Period Requirements||New Waiting Period Requirements(1)|
|Deed-in-Lieu of Foreclosure||4 years||2 years – 80% maximum LTV ratios, 4 years – 90% maximum LTV ratios, 7 years – LTV ratios per the Eligibility Matrix|
|Short Sale||2 years|
|Exceptions to Waiting Period for Extenuating Circumstances|
|Preforeclosure Event||Current Waiting Period Requirements||New Waiting Period Requirements (1)|
|Deed-in-Lieu of Foreclosure||2 years Additional requirements apply after 2 years up to 7 years||2 years – 90% maximum LTV ratios|
|Short Sale||No exceptions are permitted to the 2-year waiting period|
(1) The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios for the transaction per the Eligibility Matrix.
The multiple bankruptcy policy is being clarified to state that 2 or more borrowers with individual bankruptcies are not cumulative. For example, if the borrower has one bankruptcy and the co-borrower has one bankruptcy, this is not considered a multiple bankruptcy. The current waiting periods for bankruptcies remain unchanged.
This policy is effective for beginning July 1, 2010.
Requirements for Re-Establishing Credit
The requirements for borrowers to re-establish their credit after a significant derogatory event are also being updated. Fannie Mae is replacing the requirements related to the number of credit references and applicable payment histories with the waiting periods and other criteria.
After a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or preforeclosure or short sale, the borrower’s credit will be considered re-established if all of the following are met:
- The waiting period and the related requirements are met.
- The loan meets the minimum credit score requirements based on the parameters of the loan and the established eligibility requirements.
Now to qualify after that 2 year period, the new regulations state that a minimum 20% down payment will be required; 10% for a down payment, the wait will revert to the 4 year minimum; less than 10% for a down payment, the wait could be even longer — UNLESS there are “extenuating circumstances” such as job loss, health problems, divorce, etc…
But doesn’t pretty much any short sale by default involve “extenuating circumstances”? Just show them the hardship letter you submitted with your short sale docs. Case closed.
Why This Matters?
So why does this matter, and how should you, as distressed homeowners, USE this information?
Well for starters, if you couple this with the Obama administration’s new short sale assistance program (where mortgage servicing companies are paid $1,000 to handle successful short sales and mortgage holders get $1,500 for signing over their property), you’ve now got more compelling reasons than ever to pursue a short sale rather than just throwing up your hands and “letting things go”.