To encourage distressed borrowers to agree to deeds-in-lieu of foreclosure, Fannie Mae is reducing the waiting period — from four years to two years — for them to become eligible for a new mortgage.

The new policy, which will apply to loan applications submitted after June 30, requires a minimum downpayment of 20 percent from borrowers who have agreed to a deed-in-lieu within the past two years. Borrowers with a deed-in-lieu in the past two to four years will be required to put 10 percent down to be considered for a Fannie Mae-backed loan.

Borrowers who lost their homes due to "extenuating circumstances" beyond their control — such as the loss of a job, illness or divorce — can put as little as 10 percent down after two years.

Those loan-to-value ratios will also apply to borrowers who have been involved in short sales and who were already subject to a two-year waiting period.

Bankruptcies and foreclosures are expected to damage millions of borrowers’ credit scores, leaving many unable to obtain a mortgage for years to come (see Inman News series: "Rebuilding homeownership").

Fannie Mae generally requires five years for borrowers to re-establish credit after a foreclosure, but they may qualify in as soon as three years if they can document extenuating circumstances. The minimum wait for borrowers who have filed for bankruptcy is two to four years, depending on the type of relief sought.

Fannie Mae said the waiting periods for borrowers who have declared bankruptcy or been foreclosed on will remain in effect, and issued new guidance on requirements for re-establishing credit after a bankruptcy, foreclosure or deed-in-lieu of foreclosure.

After the waiting period has passed, only borrowers with traditional credit will be approved for loans, the policy said — nontraditional credit or "thin files" will not be accepted.

Borrowers who have filed for Chapter 7 bankruptcy liquidation must generally wait for four years after closure of the bankruptcy proceeding before Fannie Mae will consider them for a loan. The waiting period can be as short as if extenuating circumstances can be shown.

Those who have paid off all or part of their debts through a Chapter 13 bankruptcy filing may be eligible within two years of having their cases discharged. If they fail to complete their Chapter 13 plan, they are required to wait four years after their case is dismissed.


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