But, if you do work with your servicer to come to some agreement -- whether a loan modification, deed-in-lieu of foreclosure, pre-foreclosure sale or short sale -- your wait time to buy a new house will be much shorter. In fact to encourage people to work with their lenders rather than just walking away, Fannie Mae is shortening the time you'll be eligible for another Fannie Mae mortgage.
"Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting," Terence Edwards, Fannie Mae's executive vice president for credit portfolio management, said in making the announcement.
"On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer, will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."
Here's the breakdown for eligibility depending on how you got out of your last mortgage:
- Deed-in-Lieu of Foreclosure> -- reduced from four years to two years if you can put down 20 percent on your house, four years if you can only put down 10 percent.
- Preforeclosure Sale -- remains at two years if you can put down 20 percent, four years if you can only put down 10%.
- Short Sale -- will be the same as pre-foreclosure sale. Currently there are no set rules for short sale.
- Strategic Default (Walk Away) -- seven years.
All these waiting periods start on the day after the completion of a preforeclosure event or foreclosure event. If you can prove there were extenuating circumstances, such as the loss of a job, the waiting period for deed-in-lieu, a preforeclosure sale or short sale will be reduced to two years with a 10 percent down.
In all cases eligibility will be dependent on other factors, such as credit history and credit score. The eligibility matrix is complex and varies greatly depending on your economic situation. Take a close look at the matrix to figure out what you need to put down based on your credit score.
Fannie Mae is taking action now because statistics show that more and more people are willing to walk away from their home because there doesn't appear to be any negative effect. In a study from the University of Chicago the researchers found that 31 percent of foreclosures were strategic defaults. The researchers defined strategic defaulters as "homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage."
In addition to increasing the wait time until one can buy another home, Fannie Mae also will encourage servicers in states that permit them to go after a short fall, to begin chasing strategic defaulters for the money. This shortfall happens when the bank sells the foreclosed home for less than the mortgage. The bank can then go to court in many states and ask for a deficiency judgment. Not all states allow lenders to chase borrowers for the money. If you are planning to walk away from your home that is underwater, be sure to talk with an attorney to find out whether your lender can chase you for any shortfall.
You can avoid a deficiency judgment if you come to some agreement with your lender, but be sure you have a good attorney checking the agreement to be sure the lender can't chase you. In most walk-away cases you can protect yourself from a deficiency judgment with a deed-in-lieu of foreclosure or a preforeclosure or short sale.
Clearly the banks are taking note that if they don't act aggressively to collect any shortfall more people will strategically default. Now the game becomes much more serious, especially if you live in a state that allows the lender to go after you for any shortfall.
Lita Epstein has written more than 25 books, including "The 250 Questions You Should Ask to Avoid Foreclosure."
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