Lending guidelines over the past few years have gradually relaxed in certain areas. Leading up to 2008 and immediately thereafter, lenders seemed to dry up available credit for home buyers. That was true but mostly the lenders that participated in the “toxic” mortgage market disappeared and the mortgage industry returned to traditional guidelines. This return to common-sense, verifiable lending has allowed lenders to exhale so to speak and begin approving loans using established lending guidelines.
Most loans issued today are what are referred to as conventional loans. By far, mortgage loans approved using guidelines established by Fannie Mae and Freddie Mac are the most common. Such loans must adhere to certain requirements and if a loan is approved with those requirements and the loan amount is at or below the maximum limits for Fannie and Freddie, the loan can then be sold in the secondary markets, allowing the lender to make still more home loans.
If a conventional loan is above those loan limits, it is considered a “jumbo” loan. Most jumbo loans will have tighter approval guidelines such as asking for more down payment or increasing the minimum allowable credit score. Yet in California a jumbo loan is more common compared to other parts of the country and there are more jumbo loans approved. However, when potential borrowers have experienced some rather negative credit in the past, jumbo lenders will in fact scrutinize the application a bit further.
Jumbo Loans and Short Sales
A short sale is an agreement between borrowers and the lender. A short sale agreement means the lender has agreed to accept less than what is currently owed on the mortgage as “paid in full.” A short sale is a way for a mortgage company to avoid foreclosing on the subject property. A lender could consider it made more sense to accept less than what is owed due to not only the financial condition of the borrowers but the current market as well.
When property values fall, some borrowers who want to sell can’t because they owe more on the mortgage than what the property is worth. They can’t sell without bringing thousands to the settlement table to pay off the mortgage. If the lender indeed foreclosed, the lender would be in the same situation, trying to sell a property worth less than what is owed. In a short sale situation the lender agrees they will lose less with a short sale compared to the expensive, lengthy foreclosure sale process.
Okay, so what do jumbo lenders require when someone with a short sale in the past applies for a home loan?
It’s important to note here that jumbo loans don’t have as robust a secondary market as Fannie and Freddie loans do. Jumbo lenders establish their own set of guidelines and while many requirements are similar they can also insert additional guidelines to reduce perceived risk. Someone who experienced financial difficulties and there was a short sale recorded with a “Paid Less Than What Was Owed” appears on a credit report, you can understand why a jumbo lender will ask for a little more protection.
Jumbo lenders will consider a loan request with a short sale but there are waiting periods since the short sale was recorded. Many jumbo lenders for instance treat a short sale in a similar manner as a foreclosure. Such jumbo lenders will require at least a seven year waiting period after a short sale. Still others can require a waiting period of four years. However long the waiting period for any particular jumbo loan the borrowers should also have repaired their credit and income situation and reestablished credit during that time.
Jumbo Loans After a Foreclosure
A foreclosure is also a very unfortunate event for both the borrowers as well as the lender and the last choice scenario a lender will consider. While a short sale paid less than what is owed at least the lender wasn’t holding onto a property that was already “upside down” upon recovering the asset. With a foreclosure, either a short sale wasn’t applied for or agreed to, the lender was forced to take back the property. Already at this stage the lender has incurred additional legal expenses as well as lost interest from the outstanding note. The lender can then attempt to sell the property at an auction but in many cases the minimum bid needed isn’t met and the property is transferred to a department within the mortgage company called the Real Estate Owned, or REO, division which houses and markets foreclosed properties. Too many foreclosed inventory and the lender could soon be out of business.
However, that doesn’t mean you can’t get a jumbo loan after a foreclosure. Bad things happen to good people and they sometimes need a second chance. Jumbo lenders can consider that second chance but typically only for those who have reestablished spotless credit after a seven year waiting period.
Okay, what if someone has reestablished good credit but has a short sale less than four years past? What about someone who has also reestablished good credit but there is a foreclosure showing up on a credit report within the required seven year waiting period?
When banks or credit unions make their own mortgage loans without the intent to sell the loans in any secondary market, they’re approving “portfolio” loans. They keep the loan in-house, in their portfolio. This means lenders can approve a jumbo loan without adhering to secondary market standards. If someone for example has reestablished good credit and has a down payment of say 30% or more and a short sale was three years in the past, a portfolio lender might consider approving that loan.
When portfolio lenders approve a loan that might have difficulty getting an approval elsewhere they usually do so by offsetting perceived risk with other requirements.
For example, there are jumbo loan programs that only require 20% down with a short sale or foreclosure in as soon as one day past. A credit score requirement might be 660 or better or with a 25% down payment and a two-year waiting period a lower interest rate can be offered.
Rates and terms for these portfolio loans won’t be as attractive as those for someone without a short sale or foreclosure in the past and they’ll be a bit higher for those with either and reestablished credit but the goal in this situation is to help someone obtain a mortgage, get back on their feet and after time has passed, they can apply for a refinance later on. That’s typically what they’re designed for- a temporary solution for say a three, five or seven year period with an eye toward a future refinance.
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