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Fannie and Freddie Loosen Wait Times for Post-Short Sale Buying

Mortgage servicers Fannie Mae and Freddie Mac, who hold the largest share of U.S. home mortgages, have changed their short sale policies to allow sellers to buy new homes sooner after going through a foreclosure or short sale.

Borrowers previously had to wait as much as five years before they could get financing on a new home following a short sale or foreclosure. FHA loans entailed a three-year wait, while VA borrowers had to wait two years.

The new rules will reduce the waiting period for Fannie Mae and Freddie Mac loans to just two years for those coming from a short sale or a deed-in-lieu of foreclosure. The borrower can take out a loan with an 80% loan-to-value ratio, or a down payment of at least 20%.

The loan-to-value ratio goes up to 90% after for years, so waiting two years longer will allow borrowers to get financing with only a 10% down payment. Fannie Mae added a policy allowing the 10% down after two years for borrowers under "mitigating circumstances," meaning the cause of the initial default was beyond their control. Examples include medical emergencies, job loss, or a death in the family.

To qualify, borrowers must meet a minimum credit score, which is usually set by the banks but generally hovers around 680. By this time, the foreclosure, deed-in-lieu or short sale will still be on file, but a well-recovered credit report can make up for the derogatory marks.

Borrowers paying mortgage on a second home, holders of investment properties, and those who have taken out a home equity line of credit (HELOC) are not eligible for the program.