Can you get a Loan after a Foreclosure or Short Sale?
Short sales are a fact of life in Arizona residential real estate. A short sale is defined as the sale of a property, resulting in a payoff of less than the total amount owed, in lieu of a foreclosure or to permit a sale. If you are the next metro Phoenix homeowner to “short sale” your home, you will be in good company; short sales have averaged just over 20% of residential sales in 2010 (21% in May).
One reason to do a short sale is that it should have less impact on your ability to get credit in the future compared to a foreclosure. In an earlier blog I provided estimates of the effect of a short sale and a foreclosure on a credit score. Predictably a short sale had a lesser, negative effect on your credit score than a trustee’s sale according to Fair, Isaac & Co., the creator of the credit score system, although the amount of that effect is may change in the future.
But there is another reason a short sale may be advantageous over a foreclosure. A foreclosure will have the maximum negative effect on the ability of a borrower to quality for a loan insured by a governmental affiliated entity. Since the overwhelming amount of loans made are FHA, Fannie Mae and VA, this restriction could prevent a potential home buyer from getting a loan even if the credit score was otherwise sufficient.
Late last year HUD issued rules regarding the eligibility of a past short seller for a future new FHA-insured mortgage. Various criteria were established which allowed a former pre-foreclosure event borrower to receive a government insured loan under certain conditions – as opposed to the “no exception” blanket rule (for three years) that applied to borrowers with a foreclosed governmental loan.
Fannie Mae’s required “waiting period” for a borrower to be eligible for a mortgage loan after a short sale is changing to two years effective July 1, 2010. The waiting period begins on the completion date of the pre-foreclosure event, and its length may vary based on the maximum allowable loan to value ratios (LTV) and the occupancy of the property. The borrower must meet FNMA’s “extenuating circumstances” policy (such as the default being beyond the borrower’s control, which remains unchanged), with the new loan having a maximum LTV of 90%.
Fannie Mae also changed their requirements for reestablishing credit after a significant derogatory event. After a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or pre-foreclosure or short sale, the borrower’s credit will be considered reestablished if the waiting period and the related requirements are met, the borrower meets certain credit score criteria, and has “traditional” credit.
By the way, the May 2010 numbers showed that lender sales of property foreclosed upon were 37% of the residential sales for that month, leaving “normal” sales the majority of transactions at 42%.
At SimplySOLD we have the expertise to help you no matter what type of sale you need.
– N. Mark Kramoltz © 2015