QUESTION: My daughter and her husband both lost their jobs and had to sell their house in a short sale a couple of years ago. Now they are back on their feet financially and have significant savings for the down payment on a new home. Someone told them that a short sale looks just like a foreclosure on a credit report and that they will have to wait five more years before they will be eligible for a mortgage. Is this right?
ANSWER: There is a difference between a short sale and a foreclosure. The lender in a short sale approves the sale of a property to a buyer, despite not receiving the total balance due on the mortgage. Sometimes the lender's loss is small and sometimes larger.
The lender takes title to a property in a foreclosure without additional payment by the owner and then tries to recover some of the losses by reselling the property. The costs incurred in this process can be large.
Short sales are a relatively new phenomenon in the real estate marketplace and the credit reporting agencies have not had a recording code to differentiate a short sale from a foreclosure. The result has been the recording of short sales as foreclosures with all of the negative implications that "foreclosures" implies.
Under previous rules, short-sellers had to wait seven years to become eligible for a mortgage to buy a new home. Fannie Mae has recently developed a solution to help those who had to participate in a short sale. The new policy calls for different waiting periods for potential borrowers who had a short sale than the waiting periods for those who experienced foreclosure. The new period is two years for short sales compared to seven for those who were foreclosed.
The Federal Housing Authority (FHA) has also announced a new program that should help those who had to sell short. If their mortgage difficulty can be shown to have resulted from "extenuating circumstances," they could qualify for a new mortgage in one year instead of the current three-year period. An "extenuating circumstance" might be a delinquency that resulted from a 20 percent or greater decrease in income that lasted longer than six months. The loss might be the result of the death of a wage earner, loss of a job or a serious illness. They must prove that they are now fully employed, paying their bills and earning enough to qualify for a mortgage.
Freddie Mac continues to require a four-year waiting period unless extenuating circumstances can be demonstrated.
New guidelines and programs are announced somewhat frequently as the economy continues to improve. Consider suggesting that your daughter and son-in-law seek the advice of a professional, perhaps an attorney, to receive advice about their specific situation.
Attorney Sylvia Heldreth is a certified specialist in real estate Law. Her office is located at 1215 Miramar St., in Cape Coral.
This article in not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.