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Agencies Easing Rules for Military PCS Short Sales

Fannie Mae and Freddie Mac, the two quasi-federal agencies that hold a substantial number of home mortgages, are making it easier for military families with PCS orders to get out of their homes.

Specifically, they are relaxing the rules under which they will agree to a “short-sale.” A short-sale may occur when a homeowner owes more on the mortgage than the home is worth. When this is the case, the seller may get the lender to agree to a lower payoff amount. The lender may accept this lower payout amount if it will prevent a more expensive foreclosure.

Normally, lenders are reluctant to agree to short-sales. This is because short-sales represent a loss to the lender. If lenders get a reputation of being too lenient with short-sale approvals, they risk getting a flood of applicants from other short-sale hopefuls.

In the past, Fannie and Freddie have generally not approved short-sales for homeowners who were actually current on their mortgages. In fact, Fannie Mae and Freddie Mac had actually tightened their short-sale requirements last year. They generally would not approve a short sale at all unless you were delinquent, or you were in danger of an “imminent default” due to a death, disability or divorce. If you were current, the thinking was, you probably weren’t in much trouble, and there was no need for a short-sale.

This is tough on servicemembers, though, who have to move every three years to new duty stations. If they cannot sell their old home, they frequently struggled to maintain two homes they could not afford, or wound up defaulting on their mortgage – taking a credit hit that potentially endangered their security clearances.

Under the new policy, Fannie Mae and Freddie Mac will not pursue a deficiency judgment, nor any cash contribution or promissory note from members of the military with a change in duty station for any property purchased on or before June 30, 2012. You have to have a Fannie Mae or Freddie Mac loan, however, and PCS to qualify.

Don’t get excited – the policy isn’t effective yet. And they probably won’t be until this fall. The Federal Housing Authority will issue its final guidance by September 30th, 2012. The policy will become effective 60 days after that point.

Short-selling is vastly preferable to foreclosing. If you have a “debt discharged due to foreclosure” on your credit report, your FICO score could fall 250 points. A short-sale may impact your credit, under FICO rules. But it is nowhere near as severe as a foreclosure. The effect on your credit score should be around 100 points – and you will probably be competitive again for a new mortgage at market rates within 18 months, according to Lee Dworshak, a realtor in Palos Verdes, California.

Note that you may still have a Fannie or Freddie loan even if your point of contact is with USAA, Navy Federal Credit Union, or any number of other lenders. This is because lenders frequently retain the servicing rights on loans, even when the mortgage is sold upstream to Fannie Mae or Freddie Mac. So you may still qualify, even if you’re still sending your check to another financial institution, and not to Fannie Mae or Freddie Mac directly.

For more information on the program, and whether or not you may qualify, you can call the military hotlines the two agencies have established, at 1-877-MIL-4566 or 1-800-FREDDIE.

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