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Mortgages in Distress: How Fannie Mae and Freddie Mac Handles Short Sales and Foreclosures

foreclosure and short salesIf you have a mortgage, there’s a good chance that’s it’s passed through Fannie Mae or Freddie Mac. These two lending institutions are responsible for creating massive liquidity in the mortgage market. They’re also involved in foreclosures and short sales – something many homeowners are facing today. If you’re one of them, here’s what you need to know.

 Short Sale

A short sale is when you sell the home for less than what you owe on it. This is usually done when no other option, aside from foreclosure, is available. A short sale must be approved by the bank, since it is guaranteed to lose money on the deal.

In some cases, the bank will enter into a cooperative short sale. In these instances, the bank works with you to sell the house, often gives you a cash incentive to remain there so that it can be sold, and sometimes even pays for relocation once you do sell it.

Other times, the bank will stipulate that you must pay the deficiency, and a court grants the bank a deficiency judgment. This means that you must sign a promissory note for the remaining balance. These promissory notes can be interest-free, but are often not. To enter into these agreements, you may need good credit. Otherwise, if you do not pay the deficiency, the bank issues a 1099, writes off the debt, and you must claim this as income and pay tax on it.

Short sales usually limit your ability to get another loan for at least 2 years from the date of the sale with a maximum of 80 percent loan-to-value (LTV), or 4 years with 80.01 to 90 percent LTV. Otherwise, it could delay you up to 7 years.

 Foreclosures

No one likes getting foreclosed on. But, if you’re in this position, you should understand the impacts it will have on your future ability to get a loan and a home. Freddie and Fannie limit your ability to get another loan for 7 years from the original completion date of the foreclosure.

In other words, if you use foreclosure services NJ, and you end up completing the process, don’t expect to get another loan through Fannie or Freddie for 7 years. Most other banks won’t touch you either.

However, if extenuating circumstances exist, you might be able to get a loan 3 years from the completion date of the foreclosure.

If you go into bankruptcy, you only need to wait 5 years from the most recent discharge or dismissal date, unless there are extenuating circumstances – that can push the time down to 3 years before you’re allowed to get another loan.

 Exceptions To Waiting Periods

Most exceptions to the waiting period have to do with extenuating circumstances. For example, if you involuntarily lost your job, there was a medical emergency, or some non-financial hardship that caused you to fall behind on your mortgage payments, you may be eligible for another loan sooner than the normal waiting periods.

What constitutes an extenuating circumstance is often determined by the bank, a thorough review of your finances, and the specific details in your situation.

Lisa Anders is a real estate consultant who has aided many homeowners in hanging on to their mortgages. An avid writer, she loves to provide information to help people stay in their homes during times of monetary crisis. You can read her enlightening articles mainly on real estate and finance blogs.

 Image: Freedigitalphotos/net

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

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