[This article first appeared in the Chattanooga Times Free Press]
Q Can I buy a house again after selling my home as a short sale?
A Millions of Americans have lost their home to a foreclosure or short sale. Fannie Mae and Freddie Mac, who control the majority of home mortgages in the United States, realize restricting buyers from purchasing homes in the future is not a good economic decision.
Until recently, Fannie Mae and Freddie Mac had a five-year waiting period before a previously foreclosed borrower could finance a mortgage on a new home. The time frame for an FHA loan is three years and two years for a VA loan.
Fannie Mae and Freddie Mac have changed their policy and reduced the waiting period to two years for those home-owners who previously experienced a short sale or deed-in-lieu-of foreclosure. The new loan must be a loan-to-value of 80 percent. This means the borrower will be required to have 20 percent as a down payment on a new home. After four years the maximum loan- to-value jumps to 90 percent, so only 10 percent down payment will be needed by the borrower.
Fannie Mae did supply a loophole to their guidelines in an effort to help those genuinely affected by the recession and the housing down-turn. It is possible for a borrower to put down 10 percent after a two-year period under mitigating circumstances. Some of these circumstances might include a job loss or health condition that appeared to be the primary cause of the initial mortgage default.
In all instances, the borrower must have re-established their credit and meet minimum credit score requirements. From the time of the foreclosure or short sale, it is extremely important to pay your bills on time and pay down your debts to re-establish good credit. Currently your credit score must be at least in the 680 range. The foreclosure or short sale will continue to be a derogatory mark on your credit for several years. Maintaining a positive credit history from the time of the setback is critical.
Borrowers that do not qualify for this program are those with mortgages on second homes and investment properties. Anyone who obtained a home equity line of credit (HELOC), or took out a second mortgage and pulled the cash out, will not qualify for the shorter wait period.
Keep in mind if you are paying cash for a home, your mortgage history and credit scores are not important. A cash transaction will allow the buyer to purchase a home at any time in the future.
These new guidelines are in their early stages, so it will be interesting to see how banks and lenders react to borrowers who defaulted and lost their homes to a foreclosure or short sale. These new regulations always look encouraging “on paper”. We will have to wait and see whether this is a step in the right direction for the housing economy.
Also, these new guidelines are just another reason why homeowners facing a potential default on their mortgage or foreclosures should consider pursuing a short sale as opposed to letting the home go into foreclosure.
Get answers to questions you might have about real estate from Randy Durham, who is president of the Chattanooga Association of Realtors and a broker with Keller Williams Realty. His column appears on Sundays. Send your questions to Business Editor John Vass Jr. at firstname.lastname@example.org