If you are thinking of buying a homeÂ with a conventional loan, and you had a short sale, deed-in-lieu of foreclosure or mortgage loan write-off less than 4 years ago, you better be aware of some changes that will take effect in August (yes, next month). What this may mean is that you have to get into contract within the next few weeks or may risk having to possibly wait another year or two to make a home purchase.
Fannie Mae and Freddie Mac, the largest financers for the majority of loans in the U.S., announced earlier this week that they are extending guidelines for purchases after short sales, deeds-in-lieu or mortgage write offs. Starting August 16, 2014, a buyer with a past short sale (or the others) must have closed escrow on that sale 4 years before the date of purchase of a new home. The current rule is two years if the borrower is putting 20% down – see below). If there are extenuating circumstances (a death in the family or accident that affected the ability to pay the mortgage – divorce or job loss do not count as extenuating circumstances, and each lender may have different rules as to what does qualify so make sure to check), then the time period could be lessened to three years upon approval.
This rule, which has surprised many mortgage and real estate professionals, could create problems for those currently looking for homes in a market with low inventory. Note that the new purchase does not have to close by August 16, but the must be fully approved by that time. So long as you get into contract with a few weeks to spare for approval you should be fine.
Here is how the current seasoning requirements look:
- 7 years with less than 10% down
- 4 years with 10% – 19.99% down
- 2 Years with 20%+ down
Here is how the new requirements will look:
- 7 years with less than 10% down (no extenuating circumstances allowed for this program)
- 4 years with 10% down or more (2 year seasoning requirement is allowed if we can document extenuating circumstances that caused the short sale. Taking advantage of a declining market is an unacceptable hardship. Iâ€™ve written more about this subject below.)
Personally I have clients who will be affected by this new change if they do not find a home very soon. I am surprised that such a rule would be instituted in the middle of the housing recovery, when there is little inventory and the market is turning from a seller’s market to a buyer’s market. I feel this is a very bad call and that it will have negative effects on the housing market.
If you are in the process of looking for a new home and had a short sale within the last 4 years, you need to discuss this with your mortgage professional and your real estate agent.