A second chance for homeownership following mortgage troubles — for some

Here’s some good news for people who’ve had to give the deed on their house back to the bank because of financial problems, or who have done a short sale to avoid foreclosure: You may not have to wait the typical four or five years to requalify for financing to buy another home. 

Instead, it could be as little as two years.  

In a bulletin to lenders April 14, mortgage giant Fannie Mae said it is relaxing its previous rules that prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for extended periods of time. The new rules are scheduled to take effect July 1. 

Homeowners who’ve done short sales — such as under the Obama administration’s new Home Affordable Foreclosure Alternatives program — will also be able to qualify for a mortgage in as little as two years. 

Though Fannie Mae officials declined to discuss the reasoning behind the changes, the bulletin to lenders said the company hopes to encourage troubled borrowers to work out solutions that avoid the heavy costs of foreclosure. 

Fannie’s new standards come with some noteworthy fine print, however. 

To qualify for a new loan in the minimum two years, most borrowers will need to come up with down payments of at least 20 percent. If they can only scrape together 10 percent for a down payment, the mandatory wait will revert back to the former four-year minimum. And if their down payments are less than 10 percent, the wait could be even longer. 

On the other hand, if borrowers can demonstrate that their mortgage problems were directly attributable to “extenuating circumstances” — such as loss of employment, medical expenses or divorce — they may be able to qualify for new loans with minimum 10 percent down payments in just two years. 

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Freddie Mac, Fannie’s rival in the conventional secondary mortgage market, has slightly different policies on mandatory waiting periods following short sales or deeds in lieu of foreclosure. For borrowers who cannot demonstrate that extenuating circumstances caused their earlier financial problems, Freddie Mac will not approve new mortgages in less than four years. For people who lost their houses to foreclosure because of their own financial mismanagement, Freddie’s mandatory waiting period remains at five years. 

On the other hand, when there are documented extenuating circumstances, the wait period at Freddie Mac drops to two years following short sales or deeds-in-lieu, and to three years following foreclosure. 

Housing and consumer counseling advocates welcomed Fannie’s relaxation of rules that had penalized borrowers who lost their homes following layoffs, illness and other unforeseen catastrophic financial events. 

“This is a positive move,” said Marietta Rodriguez, director of homeownership and lending for NeighborWorks America, a national non-profit network created by Congress to assist with homeowner financial counseling and community development. “We all know that there are many people who through no fault of their own have to sell” — but were blocked from repurchasing a house for four years or longer, even though they’d rebuilt their credit, had qualifying incomes, and were fully capable of handling a mortgage responsibly. 

The main potential complication in Fannie’s new approach, said Rodriguez, is in its credit rehabilitation requirements. To qualify for a new mortgage, Fannie expects borrowers to re-establish their credit sufficiently to get passing grades from the company’s automated underwriting system, which considers credit bureau data among other factors. 

But according to Fannie’s bulletin to lenders, it will not consider applicants with “nontraditional” credit or “thin files,” where there is not enough history on file with the national credit bureaus to generate a risk score. 

Rodriguez worries that many homeowners who’ve lost their houses during the recent periods of high unemployment and stricter underwriting requirements by banks won’t have sufficiently “traditional” credit histories — home equity lines, revolving credit card accounts, personal loans and the like — to pass Fannie’s test. Following the tough years of the recession, their main credit data may instead be their rent payment histories, telephone and utility bill payments — none of which show up in the national credit bureaus’ files. 

Bottom line here: Fannie Mae’s revised standards may well provide an early second chance for homeownership for thousands of borrowers who assumed they’d need to wait much longer than two years. But for those who don’t have traditional credit profiles and sufficient down payments, that second chance will likely be deferred. 

Ken Harney is a real estate columnist with the Washington Post.

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