Waiting Period to Buy Again After Short Sale is Extended to 4 Years!

By Brad Yzermans on July 4, 2014 in Mortgage Guidelines

Fannie Mae quietly surprised the lending world and announced that starting August 16, 2014, the waiting period to qualify and buy after short sale has been EXTENDED to 4 years when using Conventional financing.

Boomerang buyers who short sold will no longer be able to use Conventional financing and buy in as little as 2 years after when coming up with 20% down payment.

Details of the announcement can be read here in the Fanni Mae June 17, 2014 release notes. (bottom of pg. 2) and Fannie Mae’s SEL-2014-10 Selling Guide Announcement.

Who is Fannie Mae?

Fannie Mae (and Freddie Mac) are the Government Sponsored Entities (GSE’s) who buy and securitize Qualified Mortgages, from mortgage banks and lenders. They are the super smart people who set the qualifying guidelines for Conventional financing. Banks, lenders, or mortgage brokers cannot arbitrarily make these guidelines less restrictive.

Current Fannie Mae Conventional waiting periods:

~~2 years after short sale with 20% down payment~~ now 4 years w/ 5% down
~~4 years after short sale with 10% down payment~~ now 4 years w/ 5% down
~~7 year wait after Deed-in-Lieu of Foreclosure~~ now 4 years w/ 5% down
7 year wait period after foreclosure

What Does This Change Mean? – The Bottom Line

The BAD

– If you had a short sale and were planning to buy with 20% down payment after two years, you better do it prior to August 16, 2014 or else you have to wait until your 4 years is up…..kind of like a prison term. A larger down payment will no longer help reduce the waiting period to qualify to sooner.

– You may have to choose FHA financing, which has costly mortgage insurance, if you don’t want to wait four years to use Conventional financing. This will result in higher monthly payments and eat up more of your home equity.

The GOOD

– You no longer need 10% down to qualify and buy fours years after short sale. You now only need 5% down payment to buy four years after short sale.

– If you did a Deed-in-Lieu of Foreclosure (DIL), you no longer have to wait 7 years….now only 4 years and need only 5% down.

Don’t Have 5% Down Payment? No worries, I have access to several down payment assistance programs you may be eligible for even if you had a short sale and are NOT considered a first time home buyer.

Related Article ==> 15 Acceptable Sources for Down Payment

You Can Still Buy Again 1 Day After Short Sale

==> FHA will allow borrowers to buy again after short sale if they had no late payments on any mortgage or credit lines and can prove they are not taking advantage of declining market conditions. Or, you may be eligible under the FHA Back to Work Economic Event Extenuating Circumstance rule.

==> VA financing allows buyers to qualify and buy again after short sale if they had no late payments on any mortgage or credit lines and can prove they are not taking advantage of declining market conditions.

Conventional Financing Still Allows Buying 2 Years After Short Sale

Fannie Mae still gives lenders the ability to qualify borrowers as soon as two years after a short sale with 10% down payment who have an acceptable extenuating circumstance that can be documented. Here is the verbiage direct from Fannie Mae’s selling guide:

Read more about extenuating circumstances

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure/short sale related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

3 Keys to Buying After Short Sale

At the end of the day, all lenders must conform to the guidelines set by Fannie Mae/Freddie Mac. However, MOST lenders apply additional guidelines (called overlays) that make it more difficult or restrictive to qualify (like higher credit scores or larger down payments etc..).

You want a lender who services their own loans and has little to no overlays that fights to find a way to help you qualify.
You need a Loan Originator who is willing to take the time to listen and educate you on what all of your options are…..to be honest and up front….not someone trying to ‘sell’ you.
Re-establish credit and on time pay history after your unfortunate event.

Call me direct (951) 215-6119 or contact me if you are financing a home in California and have questions about down payment assistance or need guidance on securing your loan approval.

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