Borrowers can recover from serious credit mishaps, such as deed in lieu of foreclosure, and qualify for a new loan within a matter of years. The number of years a lender requires you to wait after a financial hardship forced you to deed your home to a former lender depends on the new loan type you seek. Conventional loans are the most popular form of financing, but tend to have strict standards for credit.
Conventional financing describes loans underwritten to Fannie Mae and Freddie Mac standards. Most mortgage-lending institutions rely on these government-sponsored enterprises to provide liquidity to the mortgage market, enabling lenders to fund more loans. Fannie and Freddie buy and sell mortgages with amounts equal to or less than $417,000, known as conforming loans. Conventional loans have a minimum seasoning requirement, or waiting period, that a borrower must meet after a serious derogatory credit event such as a deed-in-lieu.
As of 2010, Fannie Mae standards allow borrowers to gain loan approval in as few as two years after a deed-in-lieu. A sliding scale based on the borrower's down payment applies. Borrowers with a 20 percent down payment and re-established credit can qualify after two years; borrowers with 10 percent down must wait at least four years. Borrowers with down payments between 5 percent, but less than 10 percent must wait up to seven years, depending on the specific loan program's eligibility requirements.
Freddie Mac requires borrowers to wait at least four years after a deed-in-lieu and borrowers must have at least 10 percent down. The borrower's financial mismanagement that led to the deed-in-lieu must not be likely to reoccur and the lender must determine whether extending credit to the borrower is merited. This comprehensive review of the borrower's current finances and credit re-establishment is conducted through manual underwriting. The lender scrutinizes credit more closely with manual underwriting than with automated underwriting.
The federal government insures loans made to moderate-income borrowers and borrowers in the military and formerly in the military. The Federal Housing Administration and the Department of Veteran Affairs ensure lenders reimbursement in the event of borrower default. The guarantees helps borrowers with credit challenges and other obstacles to financing obtain a home loan more easily. Lenders approved to participate in the government programs fund the loans and the FHA or VA insure them. The FHA requires a three-year waiting period after a deed-in-lieu and most lenders for the VA require at least two years' seasoning.
Lenders may waive or reduce seasoning requirements when a deed-in-lieu results from extenuating circumstances beyond borrower control. As opposed to financial mismanagement or financial hardship caused by divorce, job loss or job relocation, an extenuating circumstance is an isolated event. For example, the serious illness or death of a wage earner that leads to reduced income are extenuating circumstances. Fannie and Freddie require 2 years' seasoning and at least 10 percent down in such cases.
- Los Angeles Times: Fannie Mae to Shorten Waiting Periods for Some Troubled Borrowers to Get New Loans
- Fannie Mae: Underwriting Borrowers with a Prior Preforeclosure Sale or Deed-in-Lieu of Foreclosure
- Freddie Mac: Single-Family Seller/Servicer Guide: Chapter 37.7: Evaluating Borrower Credit Reputation
- HUD: Handbook 4155.1
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.