Mortgage-rule changes could affect short-sellers

After Aug. 16, the wait times to secure a new loan after a short sale may increase.

By MSN Real Estate partner Aug 4, 2014 11:50AM

© Andy Dean/Getty ImagesBy Scott Sheldon, Credit.com

 

Are you one of the millions of homeowners who short-sold a house in the last few years? If yes, starting Aug. 16, you may have to wait a little while longer for your second chance at homeownership.

 

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:

  1. Wait two more years, earmarking the upcoming four-year waiting time frame.
  2. Wait one more year to procure a Federal Housing Administration loan
  3. 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.

 

Conventional loans

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.

FHA loans

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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32Comments
Tue 4:22 AM
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Aug 6, 2014 12:52PM
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My niece did a short sale in California after trying and trying to work out something with the bank, but no, the bank chose for her to have a short sale and they sold her house to a mexican family for nearly half of what she paid for it.  Why couldn't the bank just have resold the house to her for that amount and carried a loan for the difference for her to pay and stay in her home with her 3 children.  She has been a single mom since the little one came, yet no one would listen.  The banks, lenders and government are in this scheme for themselves and nothing more.  I really hope that their karma will come around fast enough for my niece to witness it and then she will know that God is watching over her.
Aug 6, 2014 12:17PM
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I knew about this; however, I am curious if the reverse is true? Say the loan was $140,000 you owed $110,000 and it sold for $150,000 at foreclosure. Would the bank "PAY" you $40,000 - ie. the difference of what it sold for versus what you owed?
Aug 6, 2014 11:33AM
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I think the banks and our government are one in the same.  Crooks.. 
Aug 6, 2014 11:32AM
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When the market was great, people refinanced and cashed out o their equity windfall. They then proceeded to pay cash for RV's, boats and SUV's. As the housing bubble burst, they bailed out on their responsibility taking their equity purchased toys with them. Now these same people are sitting around a beer and telling anyone that listens to them how the bank screwed them. Look at the people in this segment. They took a hike on their previous homes mortgage and are now living in a very nice picket fenced home that few of us could afford.  It's good that they are after the for what is due.     
Aug 6, 2014 10:56AM
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We did a short sale because of the wife was laid off and I was given an early retirement. We were also advised by the real estate broker to do a short sale. We have been looking at properties and counting down the days until September 30 when our 2 years will be over.......this is just another reason why I am looking at moving to another country.
Aug 6, 2014 9:58AM
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This new law is just crazy.  Thanks a lot, Obama.
Aug 6, 2014 9:56AM
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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.

Aug 6, 2014 9:51AM
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Just another way to screw the average American out of home ownership. Not everyone bought a home they could not afford.  Some people lost their jobs in the economic down turn.  It is hard to pay a mortgage with no job.  But no one seems to remember that.  Just keep kicking them when they are down.   
Aug 6, 2014 9:33AM
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Banks only loan money to rich people.  Poor people and minorities cannot get a mortgage, in order,

to buy a home.

Aug 6, 2014 9:28AM
Aug 6, 2014 9:26AM
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I want to buy a house but cannot get a loan.  The banks/government are way too tight.
Aug 6, 2014 9:26AM
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This sounds like some bank sponsored " scare " article.
Aug 6, 2014 8:45AM
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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.

Aug 6, 2014 8:19AM
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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?

Aug 6, 2014 7:53AM
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That can happen. However a mortgage lender has to check so many things anymore they will most likely pull it up from somewhere else. They don't just look at credit reports anymore.
Aug 6, 2014 7:36AM
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We did a short sell two years ago and its nowhere on our credit reports. This author is gravely misinformed!
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