On August 16, 2014 Fannie Mae made some significant changes to their underwriting guidelines and to their automated underwriting system, Desktop Underwriter, in regards to previous foreclosures and short sales.
Some of the changes will likely help borrowers who had a major derogatory issue during the Great Recession, while others fall in the not-so-positive bucket.
First, Fannie tweaked their deed-in-lieu / pre-foreclosure policy by extending the waiting period from three years to four. Less than the seven year waiting period for a foreclosure, but still a significant penalty for many borrowers.
Deed-in-lieu of Foreclosure and Preforeclosure Sale
“The waiting period requirements for borrowers who have had a previous deed-in-lieu of foreclosure or pre-foreclosure 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, as specified in the Fannie Mae Selling Guide. The loan-to-value restrictions tied to different waiting period timeframes are being removed”
It’s important to note what Fannie Mae considers to be an “extenuating circumstance” as mentioned above. The primary categories for extenuating circumstances in the eyes of Fannie Mae are involuntary job loss and/or major medical issues that resulted in wage loss.
First, they do NOT define divorce as an extenuating circumstance despite the fact that they probably should.
One thing has not changed; if you are pursuing an underwriting exception due to extenuating circumstances, you had better be able to document ALL of it in a diligent and thorough manner.
Fannie Mae also added new policy in regards to foreclosure charge-offs.
“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. If the mortgage account was subject to a charge-off, the lender must document that the event was completed four or more years from the disbursement date of the new loan in order for the loan to be eligible for delivery to Fannie Mae. The event may be completed two or more years from the disbursement date of the new loan when the lender confirms that the mortgage loan meets the applicable timeframes and eligibility requirements for a charge-off due to extenuating circumstances.”
In addition to the underwriting guideline changes; Fannie Mae made several tweaks to their automated Desktop Underwriter (DU) system designed to make it easier for mortgage lenders to correctly classify major derogatory credit issues (foreclosure, bankruptcy, short sale, deed in lieu of foreclosure) as extenuating circumstance related.
Regardless, it is important to note that nearly every mortgage lender in the country relies on Desktop Underwriter in some capacity. In other words any changes can, and usually do, have a ripple effect throughout the mortgage lending landscape.
Always check with your mortgage lender to see if pending or recent Fannie Mae guideline changes will affect your ability to buy or refinance. Lender expertise should be the primary objective when selecting a mortgage lender for ANY loan in 2014, but especially if you had some major credit issues in the past.