June 14, 2009

Home Ownership After a Short Sale or Foreclosure

UPDATE: June 12, 2010

Fannie Mae Changes Waiting Period After Preforeclosure or Deed-in-Lieu of Foreclosoure

Fannie Mae has changed the required waiting period for a borrower to be eligible for a mortgage loan after a Preforeclosure or DIL of Foreclosure sale. Both policies will be effective July 1, 2010. The terms "short sale" and preforeclosure sale" mean the same thing to Fannie Mae - the sale of a property in lieu of foreclosure that results in a payoff of less than the total amount owed, which was pre-approved by the servicer.

Preforeclosure Sale: Current wait period = 2 years. New policy is 2 years with 20% down payment, 4 years with 10% down payment.

Deed-in-Lieu of Foreclosure: Current wait period = 4 years with additional requirements after 4 years up to 7 years. New policy = 2 years with 20% down payment, 4 years with 10 percent down payment.

ORIGINAL POST: June 14, 2009

How long is the wait after a short sale or foreclosure before home ownership is possible again?

It depends... Conventional, FHA and VA loan programs have different rules. The "shortest" wait period is 2 years. So if you had a short sale in 2007, the clock is ticking in your favor!

Here is an example of how the process can go very well when a family has a plan of action. In November of 2008 I was introduced to a couple who had a short sale in April of 2007 and wanted to know when they could qualify for a home loan. All of their questions were answered, advice about their credit implemented and the best financing program determined. Their wait period was 2 years so we used the remaining 6 months to prepare. In April of 2009 we had them pre-approved for a VA loan and making offers. They moved into their new home in June. A great success story!

If you're wondering ... how long do I have to wait before I can buy again ... the answer depends on the kind of loan you’re applying for, the mortgage bank you’re applying with and your credit history after the event. The waiting period begins once change of ownership has been recorded. You will find this information in the real estate documents you were given when your home was sold. Look for a HUD-1 or Settlement Statement.

In the case of foreclosure, Fannie Mae requires 5 years to pass before becoming eligible for conventional financing. A minimum FICO of 680 and a down payment of at least 20 percent is also required. FHA says the wait is 3 years while VA applies the same rules as Chapter 7 bankruptcy ... wait 2 years after discharge. If the foreclosure was on a VA loan, full entitlement may not be restored.

Prior to June of 2008, conventional rules treated a short sale the same as a foreclosure. That's when Fannie changed their policy and created a new guideline called "Pre-Foreclosure". It established a wait period of only 2 years. FHA views a short sale the same as foreclosure ... wait 3 years. VA doesn't have a seperate rule either so short sales and foreclosures are treated the same way ... wait 2 years.

In addition to the above guidelines most mortgage banks add additional underwriting rules that vary from bank to bank. Here's something else to be aware of, bankruptcy or credit counseling after a short sale will affect your timeline and need to be taken into consideration.

The best way to figure out how long you will need to wait before home ownership is possible again is to meet with a mortgage professional and set up a plan of action. This will be a time to review your tri-merge credit report, evaluate FICO scores and learn how to raise them. You will also want to learn which loan program will be best suited for your future objectives and determine what actions need to taken during your wait period so when the time is right, you will have a successful home purchase.

Loan guidelines are constantly changing so keep in mind all of the above is based on credit requirements at this point in time.

Are you ready to learn what your home ownership plan of action needs to be? My consultation services are free and the expertice is invaluable.