Short sale waiting period just got longer for many buyers

Fannie Mae recently announced an update to the guidelines which their automated underwriting engine (DU) uses to approve conventional mortgage loans in cases where the borrower had a prior short sale.

For those unfamiliar with an automated underwriting engine, think “computer underwriter”. These days all conventional mortgage loans require an approval from one of the two major automated underwriting engines. The engine used by Fannie Mae is known as DU (Desktop Underwriter), and the engine used by Freddie Mac is known as LP (Loan Prospector).

The upcoming changes to DU guidelines state that any borrower with a prior short sale on their credit report will now need to wait for 4 years before being eligible for a conventional mortgage loan. These new guidelines will go into effect on August 16, 2014 and will apply to all mortgage loan case numbers issued on or after that date. LP guidelines already require a waiting period of 4 years following a short sale for a conventional mortgage loan.

The previous DU guideline for prior short sales based the required waiting period on the amount of the down payment that the borrower was applying toward their conventional mortgage purchase. Those guidelines allowed borrowers putting down at least 20% to purchase a home as little as 2 years following their short sale, and borrowers that were putting down 10-19% to purchase in as little as three years following their short sale.

It is unclear at this time why FNMA elected to modify these guidelines but one can only assume that investors purchasing mortgage loans on the secondary market were beginning to see some losses relating to mortgage loans issued less than 4 years from the date of a prior short sale.

Our conventional financing guides, Conventional Purchase Guide and Conventional Refinance Guide, have been updated to reflect these changes.