|Lenders starting to tighten screws on short sale borrowers
Are you one of the millions of homeowners who short sold a house in the last few years? If yes, you’ll now be waiting a little while longer for your second chance.
On Aug. 16, new rules take effect surrounding a previous short sale, now requiring you to wait an additional two years before you can get a conventional loan. The following are things you need to know to get a mortgage post credit calamity.
As it presently stands
You can buy a primary home, second home/vacation property or even an income property just two years completing doing a short sale with 20 percent down. Short selling a property is selling a home for less than what’s owed, pure and simple. The reason why it’s called a short sale is because the lender is “shorted” their original dollars owed them. 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. Anytime you short sell a property, you can expect your credit to be tarnished for at least one to two years, so it’s critical you positively maintain your other credit obligations to offset the short sale credit effects.
The change that is coming
Waiting time to obtain a new mortgage increases from two years out of a short sale with 20 percent down to four years out of a previous short sale with 20 percent down. This change will affect mortgage loan applicants whose loan applications are dated Aug. 16 or after.
The effects of this change for many could be devastating, especially for home buyers.
Take, for example, the would-be home buyer who is currently house-hunting and pre-approved with a conventional mortgage with a previous short sale just three years ago. You have three choices:
• 1. Wait two more years, earmarking the upcoming four-year waiting time frame.
• 2. Wait one more year to procure an FHA Loan.
• 3. Get into contract immediately, or if refinancing, apply for a mortgage prior to Aug. 16.
There are six characteristics that constitute a mortgage application and must be valid entry for each field. Think PENCIL (Property, Estimated value, Name, Credit, Income, Loan amount).
Other factors usually come into play during a short sale, such as the possibility of a bankruptcy, or another property with occupancy concerns. Additionally, a previous foreclosure in the mix in some circumstances can add more clout in the ability to successfully reapply for a new mortgage. Following are the waiting times for most credit situations when seeking a new mortgage.
All must go through Fannie Mae and Freddie Mac’s automated underwriting system each lender uses when originating a new mortgage.
• Foreclosure – seven years from the date foreclosure was completed and transferred back to the lender to the date of the credit report. Three years is eligible 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 last seven years.
• Short sale/deed in lieu – short sale lender agrees to accept payoff for less than what is owed on the note, deed-in-lieu borrower assigns title to the lender and avoids foreclosure.
• Seven-year waiting time with less than 10 percent down of primary residence.
• Four-year waiting time with 10 percent down on the purchase of a primary residence.
• Four-year waiting time with 20 percent down on the purchase of a primary, secondary or investment property purchase.
• Two-year waiting time with extenuating circumstances only with 20 percent down.
• Bankruptcy Chapter 7 borrower does not pay any debts owed in four-year waiting time from the discharged date with the reestablished credit and no other derogatory credit.
• Two-year waiting time possible only with extenuating circumstances.
• Bankruptcy Chapter 13 debts are paid back through court order and scheduled payment plan and mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction.
• Two-year waiting time with extenuating circumstances.
• Foreclosure – Three-year waiting time to purchase a primary home from the date foreclosure was completed and transferred back to the lender to the date of the credit report.
• Short sale – Three-year waiting time to purchase a primary home from the date of title transfer.
• Bankruptcy Chapter 7 –Two-year waiting time from date of discharge to reestablish credit with no derogatory credit if a property is surrendered in the Chapter 7 bankruptcy, considered to be possible foreclosure, which could increase the waiting time.
• Bankruptcy Chapter 13 – One-year waiting time with scheduled payment plan on liabilities factored into debt to income ratio and mortgage applicant receives bankruptcy court approval to enter into the mortgage transaction.
• Foreclosure – Two-year waiting time from the date foreclosure completed and was transferred back to the lender.
• Deed in lieu – One- to two-year waiting time with reestablished credit and acceptable extenuating circumstances.
• Short sale – Two years from date previous sale closed and was transferred to new owner
• Chapter 7 bankruptcy – Two-year waiting time.
• Chapter 13 bankruptcy – One-year waiting time with bankruptcy court approval to enter into the mortgage transaction.
If you have had a previous short sale in combination with any lending risk factor, your waiting time to buy a house might be longer than you think. Lenders look at each event in a first in, first out order when reviewing your mortgage application. A previous short sale in the last few years may mean having to wait a little while longer or having monthly PMI associated with your mortgage payment.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.