By: Kenneth R. Harney
April 24, 2010
Here's some good news for people who had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure: You may not have to wait the typical four or five years to re-qualify for financing to buy another home.
Homeowners who have done short sales -- such as under the Obama administration's new Home Affordable Foreclosure Alternatives program -- will also be able to qualify for a mortgage in as little as two years. Although Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
Fannie's new standards come with some noteworthy fine print, however. To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can scrape together only 10 percent for a down payment, the wait will revert to the four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer.
On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to "extenuating circumstances" -- such as loss of employment, medical expenses or divorce -- they might be able to qualify for new loans with minimum down payments of 10 percent in just two years.
Freddie Mac, Fannie's rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods after short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their financial problems, Freddie Mac will not approve new mortgages in less than four years. For people who lost their houses to foreclosure because of their financial mismanagement, Freddie's mandatory waiting period remains at five years.
On the other hand, when there are documented extenuating circumstances, the wait at Freddie Mac drops to two years after short sales or deeds in lieu and to three years after foreclosure.
Housing and consumer counseling advocates welcomed Fannie's relaxation of rules that had penalized borrowers who lost their houses after layoffs, illness and other unforeseen events.
"This is a positive move," said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national nonprofit network created by Congress to assist with homeowner financial counseling and community development.
"We all know that there are many people who through no fault of their own have to sell," she said, but they were blocked from buying a house again for four years or longer, even though they had rebuilt their credit, had qualifying incomes and were fully capable of handling a mortgage responsibly.
The main potential complication in Fannie's new approach, said Rodriguez, is in its credit-rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to reestablish their credit sufficiently to get passing grades from the company's automated underwriting system, which considers credit bureau data, among other factors.
But according to Fannie's bulletin to lenders, it will not consider applicants with "nontraditional" credit or "thin files," where there is not enough history on file with the national credit bureaus to generate a risk score.
Rodriguez worries that many homeowners who have lost their houses during periods of high unemployment and stricter underwriting requirements by banks won't have sufficiently "traditional" credit histories -- home-equity lines, revolving credit card accounts, personal loans and the like -- to pass Fannie's test. After the years of recession, their main credit data may instead be their rent payment histories and telephone and utility bill payments, none of which show up in the national credit bureaus' files.
Fannie Mae's revised standards may well provide an early second chance at homeownership for thousands of borrowers who assumed they would need to wait much longer than two years. But for those who don't have traditional credit profiles and sufficient down payments, that second chance is likely to be deferred.