Fannie Mae Guidelines for Short Sellers

I often receive calls from Northern Michigan homeowners who are looking for advice as to how to proceed when they are no longer able to make their house payments. Fannie Mae has released updated underwriting guidelines which will apply to new mortgage loans sought by individuals with various types of prior credit problems. These guidelines certainly may impact the decisions made by these homeowners who are trying to decide how to deal with their present situation.

Potential borrowers with a foreclosure on their credit record must wait 5 years to be considered for new funding, and are subject to additional credit and down payment requirements for 5 to 7 years. This is an increase from the previous 4 year waiting period. Bankruptcies (other than Chapter 13) require a 4 year waiting period from either the discharge or dismissal date, while Chapter 13s require only a two year waiting period from the discharge date or 4 years from the dismissal date. In the case of multiple bankruptcies, the waiting period is extended to 5 years. The waiting period for Deed-in-lieu-of-foreclosures is unchanged at 4 years, with additional requirements for 4 to 7 years. The biggest change is the implementation of a mandatory two year waiting period from the completion date of any preforeclosure or short sale. The shortened waiting period for short sale sellers will certainly make short sales a more attractive option for homeowners over the alternatives.

I always advise people who need help to seek the advice of not only competent mortgage and real estate professionals, but also to consult with a real estate attorney before taking any action which they may later regret.

Think Twice About Prepaying Your Mortgage

Don't rush to pay off your low interest, tax-deductible mortgage, according to a recent study entitled "The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings," which was authored by Clemens Sialm of the University of Michigan's Ross School of Business, Gene Amromin of the Federal Reserve Bank of Chicago and Jennifer Huang of the University of Texas at Austin. According to the study, at least 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice, a mistake which is costing U.S. households about 1.5 billion dollars per year.

As interest on a home mortgage is generally deductible, a mortgage with a 6% interest rate will only cost a taxpayer in the 25% tax bracket 4.5% in after tax dollars. Rather than paying off a mortgage which is only costing 4.5%, one could make tax deferred contributions to a 401(K) or IRA, resulting in additional tax savings. Assuming an average 8% annual return on funds invested in retirement accounts, it is easy to see that funds used to pre-pay a mortgage would be more wisely invested in retirement accounts.