Fannie Mae Foreclosure, Short Sale and Bankruptcy Guides

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On June 25, 2008 Fannie Mae, under announcement 08-16, published revised guide lines that updated underwriting requirements for borrowers with prior bankruptcy or foreclosure actions in their credit history, including deeds-in-lieu of foreclosure and pre-foreclosure sales (short sales). 

The revision in guidelines is extremely important as Fannie Mae is the largest purchaser and guarantor of mortgage loans in the secondary market. Fannie Mae and Freddie Mac account for more than half of all mortgage loans in the United States as they purchase loans from lenders. Most loan programs offered by lenders conform to Fannie Mae underwriting guidelines. 

The revised guidelines were produced to address the large increase in foreclosures in the United States and in particular set out Fannie Mae’s policy for purchasing a loan where the borrower had previously filed for bankruptcy or been party to a foreclosure action. 

Fannie Mae issued the following guidelines: 

• Bankruptcy – 4 years from either the dismissal or discharge date
• Bankruptcy (Chapter 13) – 2 years from the discharge date or 4 years from the dismissal date
• Bankruptcy (Multiple Filings) – 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years
• Foreclosure – 5 years from the completion date. In addition, for the years 5 to 7 following the completion date the purchase of a principal residence is permitted with a minimum 10% down and 680 FICO score. The purchase of a second or investment property is not permitted for 7 years. Limited cash out refinances are permitted for all occupancy types. Cash out refinances are not permitted for any occupancy type.
• Deed-in-Lieu of Foreclosure – 4 year period from the date the deed-in-lieu is executed. In addition, for the years 3 to 7 following the execution date the borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited cash out and cash out refinance transactions secured by a principal residence, second home or investment property are permitted pursuant to the eligibility requirements in effect at that time.
• Pre-foreclosure (Short Sale) – 2 years from the completion date (no exceptions or extenuating circumstances). 

 The guidelines clearly set out the advantage for the homeowner to short sale a property as opposed to allowing it to go into foreclosure as the waiting period is reduced to 2 years from 4 years for a deed in lieu or 5 years for a foreclosure. The waiting period for an investment property is seven years. 

Fannie Mae’s guidelines do not apply to portfolio mortgage loans or loans not involving a mortgage such as car loans or credit cards. Unfortunately, most loans are credit history driven and the borrower’s FICO score will be negatively impacted by any foreclosure or bankruptcy filing as 30, 60 and 90 day late payments are reflected on the borrower’s credit report.

About Ross Hair 

Ross Hair is the Real Estate Advocate and President of the Real Estate Investment Association