Below are the general guidelines that FHA (Government insured loans), and Fannie Mae and Freddie Mac (Conventional/Conforming loans) have established in regards to a loan after a short sale or foreclosure. Keep in mind, lenders have the authority to lend to whomever they want, but will generally follow these guidelines. More often than not, lenders add further “overlay” restrictions of their own to these guidelines to reduce their risk.
FHA Loans
Short Sale
• Theoretically, a borrower can purchase right away if there was no mortgage default on the short sold property. However, most short sale lenders will not consider a short sale unless the buyer demonstrates a hardship and is behind on payments. They are not eligible if they pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.
• 3 year wait if in default at the closing
• Reduced wait if the borrower has re-established good credit and can show extenuating circumstances
Foreclosure or deed in lieu of foreclosure
• 3 year wait before being able to get a loan
• Reduced wait if the borrower can show extenuating circumstances and re-establishes good credit
Fannie Mae Loans
Short Sale or deed in lieu of foreclosure
• 2 year wait if the borrower puts 20 % down
• 4 year wait if the borrower puts between 10% to 20% down
• 7 year wait if the borrower puts less than 10% down
• 2 year wait if the borrower can show extenuating circumstances and puts more than 10% down
Foreclosure
• 7 year wait from the completed foreclosure sale date
• 3 year wait if the borrower can show extenuating circumstances. Additional underwriting requirements apply for 4 years after a 3 year waiting period.
• 7 year wait for a 2nd home, cash out re-financing, or an investment property
Freddie Mac Loans
Short Sale or deed in lieu of foreclosure
• 4 year wait before being able to get a loan
• 2 year wait if the borrower can show extenuating circumstances
Foreclosure
• 5 year wait from the completed foreclosure sale date
• 3 year wait if the borrower can show extenuating circumstances.
Regardless of waiting periods, borrowers must have re-established credit after the event, and credit scores must be within guidelines.
What are extenuating circumstances?
These are circumstances beyond the borrower’s control- such as death of primary wage earner, long term un-insured illness, etc.
Sources: Fannie Mae and Freddie Mac selling guides, and FHA handbook.
Basically, a short sale allows a borrower to qualify for home loan sooner than a foreclosure.
As far as income tax consequences of a short sale, deed in lieu of foreclosure, or short sale, borrowers should consult with their tax professional; the "foregiven" debt may be taxable depending on individual circumstances.
How does a Foreclosure, deed in lieu of foreclosure, or Short Sale affect Credit Scores?
According to Fair Issac (My FICO)--a company that provides analytic, decision making, and credit scoring services for financial service companies--a credit score will go down by 40 to 110 points after being 30 days late. The scoring drop will increase to 70 to 135 points after 90 days late on a mortgage payment. The average scoring drop in a short sale, foreclosure or deed in lieu is 85 to 160 points
