New Federal Guidelines For Buyers, After They Were Seller’s – Fannie Mae will make it easier for some struggling homeowners to buy houses in the future if they avoid foreclosure in the present. Under rules released this month that will take effect in July, some troubled borrowers who give up their homes by voluntarily transferring ownership through a “deed in lieu of foreclosure” or by completing a short sale, where a home is sold for less than the amount owed, will be eligible in two years to apply for a new mortgage backed by Fannie.
Currently, borrowers who complete a deed-in-lieu of foreclosure must wait four (4) years before they can take out a loan that Fannie is willing to purchase. The new policies from Fannie, a government-backed mortgage-finance company that together with Freddie Mac backs about half of the U.S. mortgage market, don’t relax waiting periods for borrowers who go through foreclosure. In 2008, Fannie lengthened that waiting period to five (5) years from four (4).
To qualify for the reduced waiting period, most borrowers will need to make a down payment of at least 20%, although borrowers with extenuating circumstances, such as a job loss, will be required to put down just 10%. Even if waiting periods are shortened, many borrowers may be unlikely to repair their credit that quickly in order to get a loan in the first place. Foreclosures and short sales generally have the same effect on a borrower’s credit score and can stay on a credit report for up to seven (7) years.
The new rules are designed to make foreclosure alternatives more attractive to borrowers at a time when the Obama administration is ramping up its effort to encourage banks to consider alternatives such as short sales. That program sets pre-approved terms for short sales and offers financial incentives to borrowers and lenders to complete such sales.
Freddie Mac requires borrowers to wait five (5) years after a foreclosure and four (4) years after a short sale or deed-in-lieu. Those periods can fall to three (3) years for a foreclosure or two (2) years for a short sale when borrowers show extenuating circumstances. Officials at the Federal Housing Administration, the government mortgage insurer, say they are considering changes to their rules, which require borrowers with a foreclosure to wait at least three (3) years before becoming eligible for an FHA-backed loan.
“We are beginning to think about post-recession, how you address borrowers who became unemployed through no fault of their own … and now deserve the right to re-enter the housing-finance system,” said FHA Commissioner David Stevens.
But some worry that policies enabling defaulted borrowers to more quickly resume homeownership could encourage more people to default. In December, the FHA unveiled rules for borrowers who completed a short sale. Those who have missed payments prior to completing a short sale or who didn’t face a hardship and simply took advantage of declining market conditions to buy a new home must wait three (3) years to re-enter the market.