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New Rules Let Troubled Borrowers Get a Mortgage Sooner

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Are you one of the millions of consumers who opted to do a short sale on your home during the mortgage crisis?  There may be some good news for you as earlier this month, Fannie Mae announced new mortgage guidelines targeted at troubled mortgage borrowers that potentially reduces the amount of time it takes to obtain a new mortgage from four years to two years.

The overwhelming majority of mortgage lenders follow mortgage underwriting rules published by Fannie Mae and Freddie Mac.  So if you lost your home to a short sale or turned it over to the bank and are now thinking of financing a new home, it’s a good idea to familiarize yourself with their guidelines. The new rules are scheduled to go into effect on July 1, 2012.

Check Your Credit For FreeAs they say, the devil is in the details and not all qualification information is available (or easily found).  In summary, you will be required to come up with a 20% down payment to obtain a mortgage in the reduced two-year time period unless you can prove your problems were the result of extenuating circumstances, for example — a divorce, medical expenses or unemployment.  In these cases, you may be able to secure a mortgage in the shorter two year time period with a lower 10% down payment.

It is my understanding that there are also requirements that interested consumers also meet certain credit and ability to pay standards and pass Fannie Mae’s credit criteria screens — which review your credit report and credit scores.

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This could be a substantial challenge for many of the consumers for whom this revised rule is targeted to benefit.

The presence of a short sale information or flag on a credit bureau report is considered negative by most all credit scores, as it predicts future credit risk. The flag can stay on the report for up to seven years.  Generally speaking, the impact on score will be severe.  The exact impact on a given consumer’s credit score resulting from the reporting of a short sale will depend on several factors:

  • The information associated with the short sale reported, and
  • The current credit profile of the consumer (the other activity being reported on the consumer).

The negative impact on score is more noticeable if this item is posted on a credit file that has no or little history of missed payments and/or derogatory information and has low balances on active credit.  In these scenarios, the points lost can be 100 or greater.  The impact may be less noticeable if there are indications of high risk behavior (missed payments, etc.) on the credit bureau report as the credit score is already lower — reflecting that higher risk behavior.

There are not really any “tricks” to quickly increase the score quickly when this information is posted on the file.  The points lost due to the short sale flag will have (gradually) less impact over time as the date it was originally posted becomes older (and assuming that you have no other delinquency information on your file).

It appears that this rule change will be most helpful to those impacted consumers who have already re-built their credit since they first enacted the short sale, have steady and sufficient income and are deemed capable of successfully handling the new mortgage they are seeking.

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Image: macrofarm, via Flickr

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