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Mortgage application hitch to be fixed by Fannie Mae

For prospective homeowners, there is perhaps nothing more nerve-wracking than sitting down with a lender to secure a mortgage.

Here, the homeowners will provide the lender with vital financial information that will be entered into a computer database, which will then proceed to analyze it as well as information contained on their credit reports. The situation becomes even more complex when the would-be lender seeks to insure the mortgage via Fannie Mae or Freddie Mac, both of which have their own underwriting software through which a mortgage applicant's information must also be ran.

Interestingly, Fannie Mae's underwriting program, Desktop Underwriter, was recently affected by a seemingly minor glitch that had major consequences for many prospective homeowners.

According to reports, Desktop Underwriter was treating otherwise qualified mortgage applicants who had previously sold their homes via a short sale as if they had instead lost their homes to foreclosure. This, in turn, caused the program to reject their applications altogether. If the prospective homeowners could produce evidence showing that the system was incorrect, the lender could then proceed to manually underwrite the loan. However, this rarely occurred.

For those unfamiliar with a short sale, it is essentially a real estate transaction in which the bank agrees to accept less than what is owed on the mortgage. In terms of applying for a mortgage, there is a significant difference between having a short sale on a credit report and a foreclosure on a credit report; people with the former on their record can apply for a new mortgage in as little as two years, while people with the latter on their record can apply for a new mortgage in perhaps as long as seven years.

The good news is that Freddie Mac has indicated that they will be fixing Desktop Underwriter next month such that the system will no longer automatically reject those mortgage applicants who have been through a short sale but who the system indicates have been through a foreclosure.

Instead of shifting to a rejection/manual underwrite, the program will allow the lender to highlight the discrepancy, provide the necessary supporting documentation, and continue with the application.

Consider contacting an experienced attorney if you would like to learn more about short sales, foreclosure or any other real estate issue here in South Carolina.

Source: CBS Moneywatch, "Fannie Mae to fix glitch that rejected borrowers," Ilyce Glink, September 27, 2013 

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