“What will this do to my ability to buy a house in the future?”
It is one of the most common questions I get when I’m on short-sale appointments in Delaware, Ohio. And, that answer just changed. And it changed a lot.
FannieMae recently released Announcement SEL-2010-05 and Desktop Originator/Desktop Underwriter Release Notes which involves them rolling out a new desktop origination program (8.1) and a bunch of new rules. The new desktop origination program is going into effect on June 19, 2010. And it is important to remember that FannieMae doesn’t “control” the mortgage market, however it has significant pull in the industry due to its ability to purchase large quantities of loans that meets it criteria. Hence, FannieMae usually “steers” the market towards its objectives due to the financial incentive to do so.
It will totally change when the new rules make it possible that you could wait seven … yes SEVEN … years to get that new mortgage.
In today’s market, the current FannieMae model looks like this:
| Sale Type | Current Waiting Period | Current Exceptions |
|---|---|---|
| Deed-in-Leu of Foreclosure | 4 Years* | 2 Years* |
| Pre-Foreclosure | 2 Years | No Exceptions |
| Short Sale | No Policy Currently Exists | No Policy Currently Exists |
Additional requirements can extend it up to seven years.
However it is going to be a lot more condensed and whether it was a deed-in-lieu of foreclosure, pre-foreclosure, or short sale is going to not make a difference in the mind of FannieMae. The new model is going to look something like this:
How the short sale is affecting your credit - in the minds of FannieMae - is changing. (Cecile Grat/sxc)
- Two Years: 80% maximum loan-to-value ratios
- Four Years: 90% maximum loan-to-value ratios
- Seven Years: Loan-to-value ratios is set by the eligibility matrix
However, just like today there are exceptions to each of the rules. In this case it is two years with the lesser of 90% maximum loan-to-value ratios or the maximum loan-to-value ratios for the transaction per the Eligibility Matrix.
If I don’t have more than 10% down does this mean I’m out?
Not really. But it does mean that you are going to have to go through more hoops in an effort to achieve the loan.
Think about it this way, if you meet the new requirements it is like getting that “Community Chest” card in Monopoly that says head directly to Go and collect $200. In this case, the electronic underwriting system from FannieMae will automatically approve your loan and move you to the next step in the process.
However, if you don’t meet the criteria – but could meet the exception – it is like having to head all the way around the Monopoly board. At every stop you could end up moving forward in the process or ending up in jail. The electronic underwriting system will kick your file to “review” and it will be reviewed by the FannieMae underwriters to see if you meet their criteria.
Is this a bad thing?
Well that depends on who you are.
If you are facing a Deed-in-Lieu of foreclosure situation then it is actually an improvement over how the majority of banks are handling the documents currently. Most mortgage companies are looking at the Deed-in-Lieu as just an “easier” foreclosure and the anchor is attached to your credit throughout the entire time it is there. The program at least allows for those facing it to rebuild their credit and – if they choose – reenter the house market quicker.
However, for short sales, this is a major change in how most mortgage folks I’ve been working with had expected. The biggest thing is the increase in down-payment requirements for those that are facing short sales and the time it takes for them to come down.
What does this really mean?
If you are struggling with your payments it is almost always better to work with the lender on a short-sale or Deed-in-Lieu (and since only one pays me, you can guess which one I like better) than to just let it go straight into foreclosure.
Special thanks to the great Ken Cook for his “Short sales in the last 7 years could mean ‘you’re out‘” on Zillow’s Mortgage Unzipped for bringing this topic to my attention.
Hey Toby,
I am not an expert on the secondary mortgage markets. However I do believe that for FHA loans we still only have to be 2 years out of a short sale in general to get a new mortgage. Any comments on FHA loans vs Fannie Mae/ conventional for this topic?
It’s important to note that under the new policy, you can still qualify for a Fannie Mae backed loan in two years with as little as 10 percent down if you can show “extenuating circumstances” such as the loss of a job, illness or divorce. You allude to the “exceptions” to the new down payment requirements, but it may not be clear to people what they are.
Think of it this way: Fannie Mae will cut you some slack if you had to do a short sale because you lost your job or were ill. But if you suddenly found you couldn’t make your payments because you took out an ARM loan to buy a house you couldn’t afford during the boom and then found yourself unable to flip it or refinance into a fixed rate loan, the higher down payment requirements will apply.
Anyone considering a short sale should be aware of the distinction the new policy makes between borrowers who find themselves in a predicament because of circumstances beyond their control, and borrowers who may share some of the blame for their situation.
Andy, my understanding is that FHA will not penalize borrowers for having a short sale in their past if they are current on their loan when the sale takes place. If they default and then pull off a short sale, there’s a 3-year waiting period.
Last point: Is a short sale still a better option vs foreclosure?
Fannie Mae generally requires five years for borrowers to re-establish credit after a foreclosure, but you may qualify in as soon as three years if you can document extenuating circumstances mentioned above.
Borrowers who have been foreclosed on within the last seven years must have a minimum FICO score of 680 and make a minimum 10 percent downpayment to qualify for a Fannie Mae-backed loan.
For FHA loans, a foreclosure or deed-in-lieu will generally leave borrowers ineligible for three years, barring extenuating circumstances.
Andy – Matt beat me to the punch, but he’s got it pretty much on the head.
On a FHA loan it is a three-year waiting period after a short-sale. The interesting thing is that if you read VA documentation it says only two years for that but then later it says they follow FHA guidelines, which means three years on a VA loan as well.
As to conventional, that’s going to be fun to watch. With the number people that could be getting shut out of the market due to FannieMae and FHA restrictions there could be a ripe market for some speculators. We’ll have to watch how it will pan out.
Today, the answer is simple – conventional is going to be more conservative than FHA or FannieMae. But, I have a hunch that is going to change in the next couple of years. (IF FHA and FannieMae continue on current conservative stances.)
Thanks Toby, and great job. All commentators and readers need to remember Fannie Mae buys loans and FHA does not. Lenders can, and do, have overlays above and beyond FHA guidelines so it is crucial to speak with a representative from the lender you are working with. Why not just go with a straight FHA underwriter? Rate may be better at a lender with more overlays.