Big Change Coming for Short Sale Waiting Periods

This information was sent to us by Jeremy House from Prime Lending and is very important. Everyone needs to read and understand this.

Are you ready for some more mortgage industry changes? This one is from the Dark Side of lending (aka – the “not making lending easier” side). Going forward (as of August 16th, 2014) Fannie Mae will no longer allow a borrower to qualify for a Conventional loan 2 years after a short sale UNLESS they can document that their short sale was caused by an extenuating circumstance (see below for definition of “extenuating circumstance”). Instead, going forward a borrower must be 4 years beyond their short sale in order to qualify for a Conventional loan.

CONVENTIONAL LOAN GUIDELINES RELATIVE TO BUYING AFTER A SHORT SALE:

Now: Fannie Mae requires 2 years after a short sale in order to qualify with 20% or more down and they require 4 years after a short sale in order to qualify regardless of down payment.

Going Forward: (as of August 16th, 2014): Fannie Mae will require 4 years to pass before a borrower can qualify for a Conventional loan regardless of down payment.

  1. Fannie Mae will still allow a borrower to qualify 2 years after a short sale if and only if they can document that an extenuating circumstance caused their short sale.
  2. Just to clarify – lenders can originate a Conventional loan and can base it off of either Fannie Mae or Freddie Mac guidelines. Either way it is still the same Conventional loan to the borrower however Fannie and Freddie guidelines can differ so that is why we look at both investors. Prior to the August 16th change, Fannie and Freddie had different short sale guidelines. If you had a client close on a Conventional loan with 20% or more down between 2 and 4 years after a short sale chances are it was based on Fannie Mae guidelines.

EFFECTIVE DATE:

These guidelines are effective for all loans submitted or resubmitted to DU on or after August 16, 2014 (note the loan does NOT have to close prior to that date however you would want it through underwriting as underwriters may rerun DU when adjusting/reviewing the file).

WHAT CAN WE DO TO ADJUST?

  1. Make sure all loan scenarios subject to this change are fully approved with a property and ready for loan docs by August 15, 2014 – LENDER MUST NOT RUN DU AFTER August 15th.
  2. Get the word out to your sphere now so they have a heads up before the guidelines change.
  3. FHA allows a borrower to qualify from 0-3 years after a short sale depending on scenario (see attached for current post short sale timeframe grid).
  4. VA does not have a mandatory post short sale waiting period.
  5. USDA does not have a mandatory post short sale waiting period

MEASURING THE SHORT SALE WAITING TIME PERIOD:

The post short sale time frame is measured starting from the date the borrower’s short sale transaction was settled and typically is documented in underwriting using a fully executed copy of the settlement statement from that sale.

EXTENUATING CIRCUMSTANCES PER FANNIE MAE:

“Circumstances that occur due to non-recurring events that are beyond the borrower’s control that result in a sudden, significant and prolonged reduction in income or catastrophic increase in financial obligations.”

I’ll just say it because I know you are thinking it – words like “non-recurring,” “significant,” “prolonged” and “catastrophic” are a bit on the vague. I agree! We can work with you to determine if a situation meets the extenuating circumstance requirement per Fannie Mae case by case.