Fannie Mae Updated Underwriting for Short Sales and Foreclosure

Fannie Mae is updating its automated underwriting system so that lenders can report when troubled borrowers completed a preforeclosure sale so they aren’t treated as if they went through foreclosure when they apply for a new mortgage.

Under Fannie guidelines, a borrower that completes a short sale or deed-in-lieu transaction can be eligible for a new loan after two years. In cases where a servicer forecloses on a borrower, they are not eligible for seven years.
Starting Nov. 16, Desktop Underwriter will “offer lenders the ability to instruct DU to disregard the foreclosure information after validating the preforeclosure sale with the borrower,” according to Fannie Mae senior vice president Stephen Pawlowski.
When a borrower completes a short sale, the credit report often reflects a foreclosure and a preforeclosure sale. Currently, DU records it as a foreclosure, which means the borrower has to wait seven years to qualify for a Fannie mortgage.
“By making this change to DU in November, lenders will have the opportunity to get a DU recommendation based on actual foreclosure/preforeclosure credit history and with the appropriate waiting period applied,” Pawlowski said in a FM Commentary.