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Third Party Problems

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Posted On: 08/28/2008

Q: I've been trying to refinance my mortgage to avoid foreclosure. The process has been terribly frustrating, taking months and months. There are unscrupulous people just waiting for borrowers like me - I paid one company $1,000 to get through to my mortgage company because I could not get anywhere with them. It was money I did not have to spare, but I was desperate. Is there anything I can do to get back my money?

A: A mortgage is an arrangement between you and a lender. There's no need to pay a third party with one possible exception: It can make sense to hire an attorney in certain circumstances to negotiate with a lender and to help you better understand loan modification and refinancing agreements.

At this point, the best strategy is to contact your state's attorney general and ask them to look into the assistance you received.

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Q: How long must I wait after a foreclosure or short sale before I can again qualify for a mortgage?

A: Traditionally, borrowers have had to wait two or three years after a foreclosure before they could again get a mortgage. The idea was to give borrowers the opportunity to re-establish credit, however there were exceptions. In some cases borrowers could get a mortgage in as little as a year after a foreclosure if they had previously had a strong credit record and if the foreclosure was the by-product of events beyond the borrower's control - say the passing of a spouse, medical costs, the loss of a job because a company closed or economic hardship because of a natural disaster.

Now, however, requirements are changing.

Fannie Mae, as one example, is a huge buyer of local mortgages - but not all local mortgages. The loans it buys must meet certain standards and some of those standards have been tightened as of Aug. 1.

What are some of the new standards?

• Expect to wait four years after most bankruptcies before you can get a new mortgage. The clock starts only when the bankruptcy is discharged or dismissed.

• "For Chapter 13 cases," says Fannie Mae, "a distinction is being made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The updated policy recognizes the fact that borrowers have reestablished credit through the successful completion of a Chapter 13 plan and subsequent discharge by requiring only a 2-year time period to elapse. A borrower who was unable to complete the Chapter 13 plan and received a dismissal, however, will be held to a 4-year time period for re-establishing credit.

• If you have more than one bankruptcy in the past seven years, you will need to wait at least five years before getting a loan. "The presence of multiple bankruptcies in the borrower's credit history," says Fannie Mae, "is evidence of significant derogatory credit and increases the likelihood of future default. The greater the number of such incidences and the more recently they occurred, the higher the credit risk."

• Short sales are treated differently than foreclosures or bankruptcies. Fannie Mae explains that "a preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action."

• For a deed-in-lieu of foreclosure, the waiting period runs at least four years.

• Fannie Mae recognizes that there may be exceptions for extenuating circumstances. With a bankruptcy, for example, it may be possible to get a new loan in as little as two years.

Since not all loans are bought by Fannie Mae, not all loans must meet its requirements. There may well be lenders out there who would consider a mortgage in less time after a bankruptcy or foreclosure. And, of course, there are predatory lenders who will make you a loan within days - financing with such harsh terms and high costs that it's likely to result in still another foreclosure or bankruptcy.

It's curious that Fannie Mae treats short sales and foreclosures differently. The general tightening of underwriting standards has made it difficult even for those with good credit to get loans, so one might think that short sellers - having left lenders with losses - would be at the end of line when it comes to new mortgages. Don't be surprised if many lenders have no interest in loans to short sellers, regardless of the new standards from Fannie Mae.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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