The rules in banking are always changing. Take short-sale rules, for example. This is an area that’s incredibly complex, and it affects all homebuyers who were burned in the last recession. A short sale is a sale in which the homeowner had to sell the property for less than what they owed on the house. If this has happened to you, you know how painful it is. What you might not know is the full downstream effect on your credit.
What Happens After A Short Sale?
When you do a short sale, what normally happens is you sell the property, but for less than the payoff value of the mortgage. In other words, the bank takes the money and closes out the loan, doesn’t go through the foreclosure process, but loses money and has to write off bad debt on the remainder of the loan.
The problem with short sales is that, usually, you get to stay in the house during the whole sale process, and you don’t have to pay your mortgage payment. Now, most people look at this scenario as a benefit - you get to live in a home “rent free.” But, there’s no free lunch.
What’s really happening is that you’re extending the derogatory remarks on your credit report and lengthening the wait time until you can buy a new home. It may even affect your ability to rent an apartment if the landlord does a credit check and sees that you’ve not fully repaid your mortgage loan.
Fortunately, this is where short sale companies can help. These types of companies use short sales, but they speed up the selling process, thus minimizing the negative effects on you. Going it alone, you could end up with 7 years of bad credit instead of just 3 or 5.
The Waiting Periods
Prior to the recent rule changes, you would have had to wait at least 3 years before securing a new loan. On top of that, you would have had to put 20 percent down on the house, and gone through rigorous checks to ensure that you were a good credit risk. In many cases, you would not get a loan for at least 7 years after your default, even though guidelines specified 3 years as the minimum waiting period.
New Exceptions And Rule Changes
In a surprise move, Fannie Mae waved the waiting period for foreclosures after a bankruptcy. This, it hopes, will add liquidity to the mortgage market and encourage banks to start lending again. It also changed the rules for short sales by allowing individuals to borrow money for a home just 2 years after the previous short sale. LTV requirements will also be removed, allowing borrowers to buy with just 5 percent down in many cases and, in some limited instances, with less than 4 percent down.
Elimination of the 20 percent down payment option after a 2-year waiting period will go into effect after August 16th. To qualify for the best rates, you need to have no late payments prior to the short sale and you must take a conventional loan. You must also be able to document a hardship, have a clear CAIVRS and an M1 mortgage credit rating on your previous loan.
Still, this radical shift in policy means that FHA loans, and any other government-backed loan, are well within reach for most Americans who suffered just a few years ago from a faltering market.