WHY is the Foreclosure Code a Problem?
The erroneous foreclosure code placed on the credit of past short sellers prolongs the ability of past short sellers to get a new conventional mortgage from two years to seven years when the past short sale credit is read as a foreclosure. Though both Fannie Mae and Freddie Mac have written guidelines that allow for a manual underwrite when an automated denial is received, very few lenders have been found that are willing to do a manual underwrite. Fear of not receiving needed reps and warranties is the reason attributed to lenders not manually underwriting these loans.
Fannie Mae and Freddie Mac conventional mortgage wait time-frames:
- after a short sale: two year wait with 20% down payment, 4 year wait with 10% down payment.
Note: Effective 8/16/2014, Fannie Mae will require a 4 year wait after a short sale, unless the homeowner can demonstrate extenuating circumstances.
- after a foreclosure: seven year wait
FHA and VA mortgages do not have this problem. A secondary automated underwriting system called Total Scorecard runs parallel to the Fannie Mae Desktop Underwriter/Originator and Freddie Mac Loan Prospector. Total Scorecard states that a mortgage discrepancy appears within the credit, but does not deny the loan and requires that the underwriter validate the true classification of the mortgage account.
Realty Trac reported there are now 2.2 million past short sellers, and as of July 2014, 9.1 million more homeowners STILL underwater that may have to short sale in the future. These numbers are huge, and attribute to 17% of total mortgages held within the U.S.
Correcting this problem will allow those eligible to repurchase a home back into the real estate market and help both the real estate industry and the U.S. economy.