Wait Time After Short Sale

Wait timeframes for Fannie Mae, Freddie Mac, FHA, VA and USDA loan after short sale

Federal Housing Finance Agency [1]

FHFA Announces New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac

Borrowers will not be eligible for a new mortgage backed by Fannie Mae or Freddie Mac for at least two years after a short sale unless Extenuating Circumstances exist.

Fannie Mae

[2]Desktop Originator/Desktop Underwriter Release Notes

DU Version 9.1 August Update/June 17, 2014

During the weekend of August 16, 2014, Fannie Mae will update Desktop Underwriter® (DU®) Version 9.1 with the changes described below.

The changes included in this release will apply to DU Version 9.1 loan casefiles submitted or resubmitted to DU on or after the weekend of August 16, 2014.

The changes in this release include:

·         Foreclosure message updates

·         Deed-in-lieu of foreclosure and preforeclosure sale message updates

·         Charge-off policy message addition

Deed-in-lieu of Foreclosure and Preforeclosure (Short Sale) Message Updates

The waiting period requirements for borrowers who have had a previous deed-in-lieu of foreclosure or preforeclosure sale are being updated to now require a four-year waiting period; though a two-year waiting period will be permitted if the event was due to extenuating circumstances and the loan complies with all requirements specific to a deed-in-lieu of foreclosure or a preforeclosure sale due to extenuating circumstances, as specified in the Fannie Mae Selling Guide. The loan-to-value restrictions previously tied to different waiting period timeframes are also being removed.

Charge-Off Policy Message Addition

A new policy will apply to mortgage accounts that have been subject to a charge-off that will require a four-year waiting period after the charge-off occurred before the borrower is eligible for a new loan that would be salable to Fannie Mae.

Previous significant derogatory events

When DU identifies a bankruptcy, foreclosure, deed-in-lieu of foreclosure, preforeclosure sale, or mortgage charge-off, and it is up to the lender to determine if the waiting period has been met, DU will instruct the lender that the waiting period is measured from the disbursement date of the new loan, not the credit report date.

On loan casefiles where DU measures the waiting period and uses that information in the eligibility assessment, the credit report date will continue to be used as DU does not know the disbursement date of the new loan. For loan casefiles that will have met the waiting period requirement based on disbursement date, but not credit report date, the lender may pull a new report after the waiting period has elapsed in order to receive an Eligible recommendation.

[3]B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit (05/28/2013)

This topic contains information on the waiting periods for significant derogatory credit events, including:

•General Information

•Identification of Significant Derogatory Credit Events in the Credit Report

•Bankruptcy (Chapter 7 or Chapter 11)

•Bankruptcy (Chapter 13)

•Multiple Bankruptcy Filings

•Foreclosure

•Deed-in-Lieu of Foreclosure and Preforeclosure Sale

•Summary — All Waiting Period Requirements

•Requirements for Re-establishing Credit

General Information
The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default risk. Examples of significant derogatory credit events include bankruptcies, foreclosures, deeds-in-lieu of foreclosure, preforeclosure sales, and short sales.

Note: The terms “preforeclosure sale” and “short sale” are used interchangeably in this Guide and have the same meaning (see Deed-in-Lieu of Foreclosure and Preforeclosure Sale below).

The lender must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information, and confirm that the borrower has re-established an acceptable credit history. The lender must make the final decision about the acceptability of a borrower’s credit history when significant derogatory credit information exists.

This topic describes the amount of time that must elapse (the “waiting period”) after a significant derogatory credit event before the borrower is eligible for a new loan salable to Fannie Mae. The waiting period commences on the completion, discharge, or dismissal date (as applicable) of the derogatory credit event and ends on the disbursement date of the new loan for manually underwritten loans, or the credit report date for DU loan casefiles.

Identification of Significant Derogatory Credit Events in the Credit Report
Lenders must review the credit report and Section VIII, Declarations, of the loan application to identify instances of significant derogatory credit events. Lenders must review the public records section of the credit report and all tradelines, including mortgage accounts (first liens, second liens, home improvement loans, HELOCs, and mobile home loans), to identify previous foreclosures, deeds-in-lieu or preforeclosure sales, and bankruptcies. Lenders must carefully review the current status of each tradeline, manner of payment codes, and remarks (descriptive text or codes such as “Foreclosure,” “Forfeit deed in lieu of foreclosure,” “Settled for less than full balance”) to identify these types of significant derogatory credit events.

Significant derogatory credit events may not be accurately reported or consistently reported in the same manner by all creditors or credit reporting agencies. If not clearly identified in the credit report, the lender must obtain copies of appropriate documentation. The documentation must establish the completion date of a previous foreclosure, deed-in-lieu or preforeclosure sale; confirm the bankruptcy discharge or dismissal date; and identify debts that were not satisfied by the bankruptcy. Debts that were not satisfied by a bankruptcy must be paid off or have an acceptable, established repayment schedule.

Foreclosure:
A seven-year waiting period is required, and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

Exceptions for Extenuating Circumstances
A three-year waiting period is permitted if extenuating circumstances can be documented, and is measured from the completion date of the foreclosure action. Additional requirements apply between three and seven years, which include:

•Maximum LTV, CLTV, or HCLTV ratios of the lesser of 90% or the maximum LTV, CLTV, or HCLTV ratios for the transaction per the Eligibility Matrix .

•The purchase of a principal residence is permitted.

•Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

Note: The purchase of second homes or investment properties and cash-out refinances (any occupancy type) are not permitted until a seven-year waiting period has elapsed.

Deed-in-Lieu of Foreclosure and Preforeclosure Sale
These transaction types are completed as alternatives to foreclosure. A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. A preforeclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer.

The following waiting period requirements apply.
Exceptions for Extenuating Circumstances
A two-year waiting period is permitted if extenuating circumstances can be documented, with maximum LTV, CLTV, or HCLTV ratios of the lesser of 90% or the maximum LTV, CLTV, or HCLTV ratios for the transaction per the Eligibility Matrix .

Note: Deeds-in-lieu and preforeclosure sales may not be accurately or consistently reported in the same manner by all creditors or credit reporting agencies. See Identification of Significant Derogatory Credit Events in the Credit Report above for additional information.

wait time fnma

Freddie Mac

¹ 37.7: Evaluating Borrower credit reputation (02/14/14)
(b)Adverse or derogatory credit information
Adverse credit information in and of itself does not mean the Borrower’s credit reputation is unacceptable. When there is adverse or derogatory information in the Borrower’s credit history, the Seller must determine whether the derogatory information is significant.

For Accept Mortgages and A-minus Mortgages, the significance of the derogatory information has already been considered by Loan Prospector and the Borrower’s credit reputation has been deemed acceptable. However, regardless of the Risk Classification received from Loan Prospector, if evidence of a short sale is disclosed on a credit report or contained elsewhere in the Mortgage file, the requirements for handling significant adverse or derogatory information caused by extenuating circumstances and financial mismanagement for Manually Underwritten Mortgages in subparagraphs (i) and (ii) below related to short sales must be met.

For other Caution Mortgages with at least two Feedback Certificate messages related to nonpayment of obligations, the Seller must presume the derogatory information is significant. The Seller must document the extenuating circumstances or conclude that the difficulties were due to financial mismanagement.

Similarly, for Manually Underwritten Mortgages underwritten using FICO scores with at least two reason codes related to nonpayment of obligations, the Seller must presume the derogatory information is significant and the Seller must document the extenuating circumstances or conclude that the difficulties were due to financial mismanagement. See Section 37.6 for additional information regarding the requirements necessary to determine a Borrower has an acceptable credit reputation for Manually Underwritten Mortgages using FICO scores in underwriting.

For all other Manually Underwritten Mortgages with or without FICO scores, the Seller must weigh the amount of derogatory information against the rest of the credit history and decide whether it is significant. In making its determination, the Seller should not ignore any derogatory credit, but must give more weight to late housing payments and to derogatory information or late payments occurring within the past two years. Generally, the more recent the adverse or derogatory credit information, the more likely it is significant.

The Seller must consider all of the following:

•The number, timing and extent of the adverse or derogatory credit information

•The number, type and size of accounts with adverse or derogatory credit information

•Public record information, such as judgments and collection accounts

•Other characteristics listed in this section

For example, Freddie Mac considers a 30-day late housing payment to have more weight than a 30-day late nonhousing payment, and a collection account to have more weight than a 30-day late payment on a revolving account.

Although there may be many situations involving derogatory credit information that are less clear, especially when disputes about obligations are involved, the derogatory credit information is not significant when it consists only of isolated late payments, even if several accounts show sporadic late payments, provided all of the following exist:

•The late payments were not recent

•The late payments did not extend beyond one month

•The number and size of delinquent accounts is not large in relation to the overall credit

•The credit history does not show multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit

•All other credit has been paid as agreed

However, the derogatory information is significant if any of the following exist:

•There are several accounts showing recent late payments

•There are multiple 60- or 90-day late payments

•There is more than one 30-day late housing payment in the last 12 months

•There are more than two 30-day or more than one 60-day late housing payments within the most recent two years

•The number and size of the delinquent accounts are large in relation to the overall credit

•There are multiple episodes of late payments extending over a period of time

•The credit history shows derogatory credit information within the two most recent years combined with multiple revolving accounts with high balances-to-limits

•The public record information reveals several occurrences of derogatory credit information, including judgments, tax liens and/or collection accounts

•There is a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale within the last seven years that is disclosed on a credit report, disclosed by the Borrower on the Form 65, Uniform Residential Loan Application, or is evidenced by other documentation contained in the Mortgage file

If the Seller decides that the derogatory information is not significant, it must provide documentation supporting its conclusion in the Mortgage file. If the Seller decides that the derogatory information is significant, it must determine whether the problems were due to extenuating circumstances or to financial mismanagement.

(i)Handling significant adverse or derogatory information caused by extenuating circumstances for Manually Underwritten Mortgages
Freddie Mac considers an extenuating circumstance to be a nonrecurring or isolated circumstance, or set of circumstances, that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information.

In addition, if the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, even if it was caused by extenuating circumstances, the Borrower’s credit reputation cannot be considered acceptable.

When the Seller uses extenuating circumstances to justify that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information, the Seller must confirm the extenuating circumstances and that the Borrower has reestablished an acceptable credit reputation. If the Seller cannot obtain third-party documentation confirming the extenuating circumstances and reestablishment of credit, it cannot consider the extenuating circumstance as an acceptable offset to significant adverse or derogatory credit information. 3rd party documentation is available to prove short sales. An acceptable hardship is  also present in order for a short sale to be approved. 

The Mortgage file must contain all of the following documentation:

• A written statement from the Borrower attributing the cause of the financial difficulties to outside factors beyond the Borrower’s control that are not ongoing and are unlikely to recur

• Third-party documentation confirming that the events related by the Borrower in the explanation were an isolated occurrence and significantly reduced the Borrower’s income and/or increased expenses and rendered the Borrower unable to repay as agreed

• An underwriting analysis on Form 1077, Uniform Underwriting and Transmittal Summary, or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that:

• The events causing the financial difficulties were beyond the Borrower’s control, are not ongoing and are unlikely to recur; and

• The Borrower has reestablished an acceptable credit reputation

Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of application and of completion of the recovery time period requirements below. In addition to the recovery time period requirements, the following additional requirements below must also be met:

FHLMC.exten circum

(ii) Handling(ii) significant adverse or derogatory information caused by financial mismanagement for Manually Underwritten Mortgages If the Seller is unable to document extenuating circumstances in accordance with Freddie Mac’s requirements, then it must conclude that the problems were due to financial mismanagement. In order to conclude that the Borrower’s credit reputation is still acceptable despite the previous financial mismanagement, the Seller must explain on Form 1077 or on a separate document in the Mortgage file, the rationale supporting its determination that the financial mismanagement is unlikely to recur and the Borrower’s credit reputation is acceptable. Making a case that the Borrower is sufficiently willing to repay obligations when significant derogatory information was caused by financial mismanagement is very difficult. It will take a longer and more convincing reestablishment period to overcome derogatory information caused by financial mismanagement than would be needed if the Borrower had experienced financial difficulties due to extenuating circumstances. When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by financial mismanagement, the Mortgage file must contain all of the following documentation:

Evidence that the Borrower has reestablished an acceptable credit reputation as required in this chapter for Manually Underwritten Mortgages

•Evidence on the credit report and other credit documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of the application, and of completion of the recovery time period requirements below. In addition to the recovery time period requirements, the following additional requirements below must also be met:FHLMC.financ mismanag

Federal Housing Authority (FHA)

4155.1 4.C.2.l/Short Sales

Borrowers are not eligible for a new FHA- insured mortgage 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.

Borrowers Current at the time of Short Sale

Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage

• All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and

• All installment debt payments for the same time period were also made within the month due.

Borrowers in Default at the time of Short Sale

Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.

Note: Borrowers who sold their property under FHA’s pre-foreclosure sale program are not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.

Exceptions: Lenders may make exceptions to this rule for borrowers in default on their mortgage at the time of the short sale

• The default was due to circumstances beyond the borrower’s control (such as death of primary wage earner, long term un-insured illness, etc.), and

• The review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.

 Back to Work – Extenuating Circumstances/8/15/2013/Mortgagee Letter 2013-26

FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.

Many borrowers experienced periods of recession related financial difficulty and/or credit impairment resulting from unemployment or a severe reduction in income. FHA recognizes the hardships faced by these borrowers, and that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

 For Purchase transactions with case numbers assigned on or after August 15, 2013 through September 30, 2016:

FHA will allow consideration of borrowers who have experienced an Economic Event and can document that certain negative credit ratings resulted from loss of employment or significant loss of Household Income beyond the borrower’s control; and the borrower has demonstrated full recovery from the event and completed housing counseling.

The guidance in Mortgagee Letter 2013-26 may be applied for borrowers that experienced extenuating circumstances related to an Economic Event as described in Mortgagee Letter 2013-26; and received a REFER recommendation from TOTAL; or an Accept/Approve but are manually downgraded.

  1. An Economic Event is any occurrence beyond the borrower’s control that results in:
  2. A 20 percent or more reduction in a borrower’s Household Income for a minimum period of six months resulting from a Loss of Employment, Income or a combination of both. An Economic Event includes the following definitions:

• Onset of an Economic Event: The month of loss of employment/income.

• Recovery from an Economic Event: The re-establishment of satisfactory credit for a min. of 12 months.

Veterans Administration (VA)

f. Foreclosures

The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.

  • Develop complete information on the facts and circumstances of the foreclosure.

Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”

Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law

You may disregard a bankruptcy discharged more than 2 years ago.

United States Department of Agriculture (USDA)

Effective 12/1/2014: Evaluating Credit Involving Short Sales

  • A short sale is considered a pre-foreclosure activity or event.
  • An applicant is ineligible for a mortgage loan if they pursued a short sale agreement on their principal residence to take advantage of declining market conditions and purchases at a reduced price a similar or superior property within a reasonable commuting distance.
  • If an applicant was current at the time of short sale, they may be eligible for a new mortgage loan. The prior mortgage payment history must reflect all mortgage payments due were made on time for the 12 month period preceding the short sale and all installment debt payments for the same period were also made within the month due.
  • An applicant in default on their mortgage at the time of the short sale (or preforeclosure sale) is not eligible for a new mortgage loan for three years from the date of pre-foreclosure sale.

Credit History

Applicants must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due. A credit history reflecting any or all of the following is considered unacceptable credit history:

  • More than one 30-day late within the past 12 months.
  • Bankruptcy or foreclosure discharged less than 36 months
  • Outstanding judgments within the past 12 months
  • Two or more rent payments 30 days late within the past 3 years.
  • Outstanding collection accounts with no payment arrangements
  • Outstanding tax liens or delinquent federal debt with no payment arrangements
  • Accounts converted to collections in the past 12 months.

Mitigating Factors to Unacceptable Credit:

Adverse credit waivers may be granted for mitigating factors to establish the applicant’s intent to good credit. Lenders must document these circumstances which were beyond the borrower’s control and have been removed:

  • Circumstances for adverse credit were temporary in nature, beyond the applicant’s control and have been removed. Examples:increased expenses due to illness and/or medical expenses, injury, death, etc.
  • Applicants must not be delinquent on any debts owed to the Federal Government

Streamlined Underwriting Criteria/(Credit score 620 or higher)

For borrowers with a credit score of 620 or higher, lenders may evaluate loans utilizing USDA’s streamlined underwriting guidelines.

  • Lender shall not be required to document adverse credit history except for those involving a delinquent federal debt or previous agency loan.
  • Lender shall not be required to obtain a rental history rating
  • No action will be necessary for any derogatory items, (i.e. no letters of explanation, unpaid collection accounts not required to be paid off, etc…)

Credit score of 619 to 580

Statistically, borrowers with credit scores within this range demonstrate a higher likelihood of default and therefore, lenders should evaluate loans carefully and be cautious of layered risk in addition to the lower credit score. For example, a ratio waiver should be avoided unless strong compensating factors are present. In addition, lenders should be cautious when applicants have no rent or housing history to verify.

If an adverse credit history waiver is requested, the lender must document that the circumstance:

1) was temporary in nature, and

2) beyond the applicant’s control, and

3) has been removed so reoccurrence is unlikely.

Credit score of 580 or below

Statistically, borrowers with credit scores within this range have demonstrated a much higher rate of default in the GRH program. Lenders should not approve loans with credit scores of 580 and below if they exhibit any of the following:

  • One or more 30-day lates in the past 12 months.
  • Bankruptcy or foreclosure discharged less than 36 months.
  • Outstanding judgments within the past 12 months.
  • Two or more rent payments 30 days late within the past 3 years.
  • Outstanding collection accounts with no payment arrangements that are currently due.
  • Outstanding tax liens or delinquent federal debts with no payment arrangements
  • Accounts converted to collections in the past 12 months.

Extraordinary compensating factors must be present to allow an adverse credit history waiver.

Additional risk layers in addition to the lower score is not recommended.

No credit score – Non-traditional credit

No additional layers of risk are advisable for applicants with non-traditional credit.

At least 4 non-traditional credit references, for a period of 12 months or more, should be developed, comprised of the following:

  • Rental or housing payment
  • Utility payment records
  • Insurance payments
  • Payments to a retail store

[1]FHFA Announces New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac/8/21/2012 http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-New-Standard-Short-Sale-Guidelines-for-Fannie-Mae-and-Freddie-Mac.aspx
[2] Desktop Originator/Desktop Underwriter Release Notes/DU Version 9.1 August Update
[3]2014 Selling Guide/Part B, Origination Through Closing/Subpart B3, Underwriting Borrowers/Chapter B3-5, Credit Assessment/Section B3-5.3, Traditional Credit History    http://www.allregs.com/tpl/Main.aspx
[4] Single-Family Seller/Servicer Guide, Volume 1/Chs. 37-38: Credit Underwriting/Chapter 37: Underwriting the Borrower/37.7: Evaluating Borrower credit reputation (02/14/14)  http://www.allregs.com/tpl/main.aspx
[5] Short Sales and Short Pay Offs/Dept of Housing and Urban Development12/16/2009/ Mortgagee Letter 09-52   http://portal.hud.gov/hudportal/documents/huddoc?id=09-52ml.pdf
[6]Back to Work – Extenuating Circumstances/8/15/2013/Mortgagee Letter 2013-26  http://portal.hud.gov/hudportal/documents/huddoc?id=13-26ml.pdf
[7] Ch. 4- Credit Underwriting; www.benefits.va.gov, pg 4-45
[8]Ch. 4- Credit Underwriting; www.benefits.va.gov, pg 4-44
[9] USDA Chapter 10: Credit Analysis 7 CFR 3555.151 Effective 9/1/2014 https://usdalinc.sc.egov.usda.gov/docs/rd/sfh/3555/ByIndividualChapter/Chapter10_Credit_Analysis_DRAFT.pdf