Understanding Short Sale, Deed-in-Lieu and Foreclosure - How Do Each Affect When You Can Get Your Next Mortgage?

Too many homeowners act on bad advice, false assumptions or allow themselves to be conned when choosing one of these options.

Over the last couple of weeks, in speaking with numerous homeowners, real estate agents and investors, I’ve noticed that there’s a lot of confusion and misunderstanding about the impact of Short Sales, Deed-in-Lieu’s and Foreclosures on one’s ability to get a new mortgage. Over and over again, I’ve heard self-proclaimed experts make many incorrect statements. I even overheard a real estate agent in Home Depot giving bad information to someone about a short sale and how this individual can turn around and buy right away! After considering the real estate agent was selling himself inside Home Depot, I quickly tracked the receiver of bad information down the aisle and gave him my card to tell him he needs sound advice. There's been so many of these instances, that I felt compelled to do my best to separate reality from myth, fact from fiction.

Getting a New Mortgage

It’s actually pretty easy to provide concrete proof of when it’s possible to qualify for a new mortgage after a Short Sale, Deed-in-Lieu or Foreclosure. The mortgage meltdown has reduced the main players in the mortgage industry to FNMA, FHLMC, FHA, VA and RD. Gone are the numerous subprime and Alt-A players that seemed to have a mortgage program for anyone.

FNMA – Federal National Mortgage Association

• Short Sale: FNMA refers to these as “Preforeclosure Sales” and requires a 2 year waiting period after the sale, with acceptable re-established credit.
• Deed-in-Lieu: Minimum waiting period of 4 years, with a minimum of 10% down required for 7 years. There is a 2 year exception for extenuating circumstances.
• Foreclosure: Standard of 5 years waiting period, with minimum of 10% down & 680 credit score for 7 years. Primary residences only, no second homes or investment property loans for 7 years. There is a 3 year exception for extenuating circumstances
• Bankruptcy: Chapter 7 requires a 4 year waiting period, but there is a 2 year exception for extenuating circumstances. Chapter 13 is 2 years from discharge date or 4 years if the Chapter 13 is dismissed (not completed).

FHLMC – Federal Home Loan Mortgage Corporation

• Short Sale: FHLMC refers to these as “Short Payoffs” and requires a 4 year waiting period after the sale, with acceptable re-established credit. There is an exception for extenuating circumstances of 2 years.
• Deed-in-Lieu: Minimum waiting period of 4 years, with a minimum of 10% down required for 7 years.
• Foreclosure: Standard of 5 years waiting period, with minimum of 10% down for 7 years. Primary residences only, no second homes or investment property loans for 7 years. There is an exception for extenuating circumstances of 3 years.
• Bankruptcy: Chapter 7 requires a 4 year waiting period. Chapter 13 is 2 years from discharge date or 4 years if the Chapter 13 is dismissed (not completed).

FHA – Federal Housing Administration

FHA is a part of HUD and as of this point does not differ in how they address Short Sales, Deed-in-Lieu’s or Foreclosures. They’re all treated the same. Standard of 3 years waiting period required. There is an exception for extenuating circumstances.

• Bankruptcy: Chapter 7 requires a 2 year waiting period, minimum 12 months with extenuating circumstances. Chapter 13 requires 12 months of timely payments and must have court’s authorization.

VA – Veterans Administration

The credit requirements are the same as FHA.

RD – Rural Development

A part of the U.S. Department of Agriculture. The credit requirements are mostly the same as FHA & VA.

• Bankruptcy: Minimum 3 year waiting period required, no difference between Chapter 7 or 13. Extenuating circumstances may be considered for exceptions.
  

I highly recommend knowing the facts. Direct anyone giving you contradictory information to me, so I can reference the factual information with them.

One small concluding fact:
The most important part of a Deed in Lieu of Foreclosure is for the borrower to demand cancellation of the unpaid dept and a letter to that effect from the lender. The best advice I could give anyone thinking of a deed in lieu or foreclosure is to seek the advice of an attorney. It's also important for short sales. Additionally, it's a risk when a lender bids less than the mortgage balance due at the foreclosure sale. They have 6 years to pursue a deficiency judgment against the borrower(s).