Fannie Mae reducing wait for home loan after short sale
WASHINGTON — Here's some good news for people who have had to give the deed on their house back to the bank or who have done a short sale: You may not have to wait the typical four or five years to requalify for home financing.
In fact, your wait may be as little as two years. In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing rules that prevented loan applicants who participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1.
Though Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
Fannie's new standards come with some noteworthy fine print, however. To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can only scrape together 10 percent, the mandatory wait will revert to the four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer.
On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to "extenuating circumstances" — such as loss of employment or medical expenses — they may be able to qualify for new loans with a minimum 10 percent down payment in just two years.
Freddie Mac, Fannie's rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods after short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their financial problems, Freddie Mac will not approve new mortgages in fewer than four years. For people who lost their houses to foreclosure because of their own financial mismanagement, Freddie's mandatory waiting period remains at five years.
On the other hand, when there are documented extenuating circumstances, the wait period at Freddie Mac drops to two years after short sales or deeds-in-lieu, and to three years after foreclosure.
Housing and consumer counseling advocates welcomed Fannie's relaxation of rules.
"This is a positive move," said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national nonprofit network created by Congress to assist with homeowner financial counseling.
"We all know that there are many people who through no fault of their own have to sell," she said. These people then were blocked from repurchasing a house for four years or longer, even though they had rebuilt their credit, had qualifying incomes and were capable of handling a mortgage.
The main potential complication in Fannie's new approach, Rodriguez said, is in its credit rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to re-establish their credit sufficiently to get passing grades from the company's automated underwriting system, which considers credit bureau data among other factors.
But according to Fannie's bulletin to lenders, it will not consider applicants with "nontraditional" credit or "thin files," where there is not enough history on file with the national credit bureaus to generate a risk score.
Rodriguez worries that many homeowners who have lost their houses recently won't have sufficiently "traditional" credit histories — home equity lines, revolving credit card accounts, personal loans and the like — to pass Fannie's test. Following the tough years of the recession, their main credit data may instead be their rent payment histories and telephone and utility bill payments — none of which show up in the national credit bureaus' files.
Bottom line: Fannie Mae's revised standards may provide an early second chance for homeownership for thousands of borrowers who assumed they'd need to wait much longer.
Ken Harney can be reached at email@example.com.