Mortgage-rule changes could affect short-sellers
After Aug. 16, the wait times to secure a new loan after a short sale may increase.
Short-selling a property is selling a home for less than what's owed, pure and simple. The reason it's called a short sale is because the lender is "shorted" the original amount owed to it. Unfortunately, short sales have nothing to do with how long they actually take; the irony is they actually take longer to close than a traditional sale or foreclosure sale. Any time you short-sell a property, you can expect the item to remain on your credit report for seven years, so it's critical you positively maintain your other credit obligations to offset the credit effects of the short sale.
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The upcoming change
As it stands, you can buy a primary home, second home/vacation property or even an income property with 20 percent down just two years after a short sale. But the waiting time to obtain a new mortgage will increase from two years out of a short sale with 20 percent down to four years out of a short sale with 20 percent down. This change will affect homebuyers whose loan applications are dated Aug. 16 or later.
This change could be devastating for many homebuyers.
Take, for example, the would-be homebuyer who is currently house-hunting, pre-approved with a conventional mortgage with a previous short sale just two years ago. That homebuyer will have three choices:
- Wait two more years, earmarking the upcoming four-year waiting time frame.
- Wait one more year to procure a Federal Housing Administration loan
- Get into contract immediately or, if refinancing, apply for a mortgage prior to Aug. 16.
The new wait times
Other factors usually come into play during a short sale such as the possibility of a bankruptcy or another property with occupancy concerns. Here are the waiting times when seeking a new mortgage, with consideration to most credit issues.
All conventional loans must go through Fannie Mae and Freddie Mac's automated underwriting system each lender uses when originating a new mortgage.
If you have a foreclosure: You'll have to wait seven years from the date the foreclosure was completed and transferred back to the lender to the date of the credit report. You can be eligible for a conventional loan three years after foreclosure with extenuating circumstances — such as death of a wage earner, illness or job loss — however, the loan must still pass an automated underwrite, which red flags a previous foreclosure in the past seven years.
Short sale/deed in lieu-short sale: The lender agrees to accept payoff for less than what is owed on the note; the deed-in-lieu borrower assigns the title to the lender and avoids foreclosure.
- Seven-year wait with less than 10 percent down of primary residence
- Four years with 10 percent down on the purchase of a primary residence
- Four years with 20 percent down on the purchase of a primary, secondary or investment property purchase
- Two years with extenuating circumstances, only with 20 percent down
If a Chapter 7 bankruptcy borrower does not pay any debts owed, it's a four-year wait from the discharged date with the re-established credit and no other derogatory credit, but a two-year wait is possible only with extenuating circumstances.
If Chapter 13 bankruptcy debts are paid back through court order and scheduled payment plans, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction, it's a two-year wait with extenuating circumstances.
Foreclosure: It's a three-year waiting time to purchase a primary home from the date the foreclosure was completed and transferred back to the lender to the date of the credit report.
Short sale: Three years to purchase a primary home from the date of title transfer.
Bankruptcy Chapter 7: Two years from the date of discharge to reestablishing credit with no derogatory credit. If a property is surrendered in the Chapter 7 bankruptcy, it is considered to be possible foreclosure, which could increase the waiting time.
Bankruptcy Chapter 13: It's a one-year wait with a scheduled payment plan on your liabilities factored into debt-to-income ratio, and the mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction.
Department of Veterans Affairs loans
Foreclosure: Two years from the date the foreclosure was completed and transferred back to the lender.
Deed in lieu: One- to two-year wait with re-established credit and acceptable extenuating circumstances.
Short sale: Two years from the date the previous sale closed and was transferred to the new owner.
Bankruptcy Chapter 7: Two-year wait.
Bankruptcy Chapter 13: One-year wait with bankruptcy court approval to enter into the mortgage transaction.
As you can see, if you have had a previous short sale, in combination with any other lending risk factor, your waiting time to buy a house might be longer than you think. Be sure to communicate with a lender who can accurately give you the appropriate waiting time-frame for your particular credit situation. Lenders will look at each event and a first-in/first-out order when reviewing your mortgage application. A previous short sale in the past few years may mean having to wait a little while longer, or having monthly private mortgage insurance associated with your mortgage payment, which is required for an FHA loan.
If you've had credit problems in recent years and you hope to buy a house soon, it's important to get up to speed on your current credit situation. Pull your credit reports to assess your overall situation (you can pull them for free once a year), noting any mistakes or derogatory items. It's also helpful to get in the habit of monitoring your credit scores to track your progress over time.
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Just wait, the Second Revolution is coming, home ownership will cease, you will simply squat in what you want, that's it. Burn the Banks to the ground.
anarchy will rule.
Banks only loan money to rich people. Poor people and minorities cannot get a mortgage, in order,
to buy a home.
Amazing that the financial institutions got away with so much (and still do) are pushing for tougher penalties for individuals. They made loans to people knowing the mortgages are way higher than the real estate backing them. If they would have said no, people would not have been buying homes at those prices and if no one buys them the prices will go down to a more appropriate cost for the area.
Nothing comes without a cost. If they make it harder for people to purchase primary homes because of a penalty it will just inflate rentals making it near impossible to save 20% for a down payment.
Choice Number Four:
Call your old bank, pay back the amount of the "shortage".
The big bad bank, which nobody hated when they were getting their loan, was not your partner in the house investment. How many people would share a windfall with their lender is they sold the house for a profit?