Question: My Client sold his home with a short sale and now wants to purchase another home. What are the options?
Answer: Fannie Mae or conventional loans up to $417,000 has finally addressed the issue of buying after a short sale. The following guidelines are effective after July 1, 2010:
• Two year wait with 20% down
• Four year wait with 10% down (and mortgage insurance company approval)
If there are extenuating circumstances defined as nonrecurring events that are beyond the borrower’s control such as a death, or act of God, or serious illness (divorce or a change in employment does not count), the following is the guideline also effective July 1, 2010:
• Two year wait with a minimum of 10% down and mortgage insurance approval.
The extenuating circumstance will need to be documented. A few years ago, back when you could do low credit score borrowers, one of our clients was late on her house payment due to a tornado destroying it. (No, it wasn’t a mobile home) She provided before and after pictures. As a result of her careful documentation she was approved for her loan.
Banks may have their own extra layer. The chatter on the street is that they don’t care what Fannie’s guidelines state; they are going to make the
prospective buyers wait it out for three to five years.
Desktop underwriting requires tweaking to mirror the updated short sale requirements. What does that mean to you? As of today, the automated underwriting systems may spit out a positive decision if the credit scores are high enough and the mortgage lates minimal. An unknowing loan officer may think the loan is approved. Your client could get all the way to underwriting, only to find out the borrower does not meet the current guidelines.
Also, credit will need to be re-established. Fannie is still working on the exact requirements. But a good guess would be the following:
• Credit scores above 720
• No late payments or collections
• Three lines of current, established credit
FYI: FHA will immediately finance a buyer after a short sale as long as the lender did not report any lates on their mortgage the previous 12 months before the sale; and they were not late on any installment debt. Keep in mind the buyer will need a good reason for the short sale. And my house was worth a third of what it is owed is not an acceptable explanation.