In the next couple weeks, it might be harder to buy a new property after experiencing a short sale, assuming you plan on using a Fannie Mae-backed loan to get the job done.
At the moment, you can get a Fannie-backed loan just two years after selling your previous home short, even without extenuating circumstances. You just need to put 20% down. But that will soon change.
No More LTV Restrictions
Going forward, Fannie will remove the loan-to-value ratio (LTV) based guidelines and set forth a standard four-year waiting period, with a two-year waiting period if you can prove extenuating circumstances.
In other words, say you experienced a short sale two and a half years ago, and now have your sights set on a sparkling new property. You’re ready to own again!
Well, per the current Fannie Mae rules, you can buy a home again as long as you can muster 20% down on the new loan and qualify per standard guidelines. After all, that much skin in the game is sure to result in a good loan this time around…
But soon LTV won’t matter, so for these borrowers, they’ll either need to prove extenuating circumstances or wait a full four years.
For the record, Freddie Mac has a standard four-year wait period as well, so that’s not a solution.
The FHA allows short sale borrowers to get mortgages after just three years (without extenuating circumstances), but the hefty premiums might be too much to bear for many homeowners.
If you can prove it was out of your hands, the FHA is an option after just one year!
Can You Prove an Extenuating Circumstance?
Assuming you’re one of those unlucky borrowers who falls between two and four years since short sale, you might still qualify if you can prove extenuating circumstances led to default.
Fannie Mae defines them as nonrecurring events that resulted in sudden/significant reductions in income, or a catastrophic increase in your financial obligations.
For example, job loss, long-term illness, divorce, or another significant event beyond your control that forced you to miss payments and experience default.
You’ll also need to document the event with things like a copy of the divorce decree, medical reports and/or bills, notice of the job layoff, and so on. And explain why it contributed to your inability to resolve the problem and stay good on your previous mortgage.
Lastly, you will have needed to re-establish good credit since the event that caused your credit to take a hit.
Assuming you can do all that, you might still be able to qualify for a mortgage with Fannie Mae just two years after experiencing a short sale, but it’s certainly no guarantee.
The change is effective for all mortgages with applications dated on or after August 16th, 2014. Fannie Mae made some other changes as well, which are documented in their recent announcement.