Following the recession years, I am continually asked this question: “I have defaulted on my previous home loan. How long do I need to wait to get a new loan?”. Well, a simple question does not necessarily mean I have an easy answer. Things are always decided by a lender on a case-by-case basis, therefore keep in mind that the following is only a broad indication of what lenders look at when originating new loans. Fannie Mae purchases in the secondary market make up the lion’s share of the loans originated by most lenders. Fannie Mae has their own guidelines which are the benchmark for most lending institutions. These guidelines are pretty strict and most conventional lenders – including lenders who lend on jumbo loans – seem to use the Fannie Mae guidelines as a rule on whom to lend to.
Fannie Mae just announced that on August 16th, 2014 the minimum wait period for a borrower who has previously defaulted will be increased to 4 years. This means that most lenders, whether they resell to Fannie Mae or not, will be likely to implement this new rule. This is a very important issue because it can be a double-edged sword and it needs to be looked at more closely.
Currently, a borrower who defaulted because of a short sale will have to wait 2 years if he puts down at least 20% on a new purchase. After August 16th, the same borrower with will have to wait at least 4 years in order to get a new loan. It appears that the longer waiting period is also coming with some positive news in the form that lower down payments will be required. I have yet to see something in writing as to how much a borrower will be required to put down on a conventional loan, so I’ll leave this for a new blog down the road. With these new rules going into effect, I think one of two scenarios could happen:
- The market could slow down because fewer loans will be originated. Banks thrive on the interest they charge, therefore less interest generated = lower returns, or
- The market could improve because there will be fewer defaults ending up in foreclosures and short sales in the near future.
Which scenario is more likely to play out is anybody’s guess. I know the intention of Fannie Mae is to avoid buying loans again and again that were granted to repeat offenders which could result in a new default. Statistics have shown that borrowers who have defaulted once are more likely to default again when compared to borrowers who have never defaulted. However, as I said earlier, there may not be a direct correlation between tighter restrictions and an improved market. It remains to be seen.
In the meantime, I would encourage anyone who has been thinking about buying to hurry up and get in as soon as possible. We all know that these low rates cannot go on indefinitely so mark my words: this free-for-all will not go on forever. The Feds are getting a lot of pressure to increase interest rates and re-value the dollar higher from banks all over the world and especially from the European Central Bank. The Euro is currently quoted at 1.35 vs. the US dollar which makes our goods cheap and affordable compared to those manufactured and sold in the EU, but that doesn’t help our oversea partners and their goods. Interest rates are still at record lows and before these restrictions become effective now may be the optimal time to purchase a home.