I am frequently asked this question. Here are current guidelines that help give a good picture of what you might expect. Since millions of homeowners have been negatively impacted by this crisis it’s possible that lender requirements may be modified in the future to reflect the anomaly. There is safety in numbers and since so many have needlessly suffered due to this catastrophic event; guidelines might be relaxed to help victims of the housing crisis regain home ownership more quickly. It would be a good idea to check with me annually to see what changes may occur that could help former homeowners.
A Short Sale is an option of a homeowner selling a home for less than the balance on their current mortgages and the mortgagee agrees to a reduced payoff. The bank’s decision to allow a Short Sale is typically in lieu of the foreclosure process which can result in heft fees for the bank. This process and agreement does not necessarily release the homeowner from the obligation to pay the remaining balance of the loan known as the DEFICIENCY.
- FHA requires 36 months in most situations. If CERTAIN GUIDELINES are met that follow Mortgagee Letter 09-52… the homeowner could qualify for an immediate purchase. Did you catch that… RIGHT AWAY. This is an important guideline change that is often misunderstood.
- Fannie Mae guidelines right now require a 72 month seasoning for FULL ELIGIBILITY. After 24 months… a borrower could qualify with at least 20% down and after 48 months the maximum LTV is 90%. Their “extenuating circumstances” rule may allow someone to only have to put 10% down in as little as 2 yrs.
- Freddie Mac is sticking to their 48 month seasoning… or 24 months if their ”extenuating circumstances” guidelines can be proven/met.
- VA guidelines that we’ve seen have looked very similar to FHA’s above; 36 months OR if after 12 months and fitting the similar new guidelines of ML 09-52.
- USDA generally requires 36 months OR with the right underwriter’s “waiver” and approval.
A foreclosure is the legal process by which a mortgagee (typically a bank) obtains a court ordered termination of the home-owners “equitable right of redemption”.
- FHA requires a 36 months seasoning
- Fannie Mae and/or Freddie Mac require 84 months (SEVEN YEARS) from the completion of the Foreclosure for the Date of the credit pull for the new loan. The old “between 5 and 7 year rule” was changed effective October of 2010. Now there is a 3 yr “extenuating circumstance” rule (90% LTV for a primary residence) with Fannie Mae and its at only 2 yrs with Freddie Mac.
- VA follows their guidelines for a Chapter 7 BK with the request that the complete facts / circumstances of the Foreclosure be submitted AND if the Foreclosure was on a VA loan note that “full entitlement” will not be available for the new loan.
- USDA generally requires 36 months OR if after 12 months, reestablished credit and an underwriter “waiver”. This is completely up to the discretion of the u/w… do you have a good one?
The two most common types of bankruptcy (BK) are the Chapter 7 (liquidation) and the Chapter 13 (reorganization).
- FHA will need a Chapter 7 BK to be dismissed 36 months. Someone who is IN a Chapter 13 and is in the process of REPAYING their debts can qualify for a FHA loan after 12 months of proof of repayment, no “lates” on anything on their credit report AND “permission from the court”.
- Conventional Financing with the Federal National Mortgage Association (FNMA/Fannie Mae) after a Chapter 7 is allowed after 48 months from the discharge/dismissal date. A two-year waiting period is allowed if certain ”extenuating circumstances” can be documented. The time is extended to 60 months if there is more than one BK within the last 7 yrs.
- Conventional Financing with the Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac) will generally require a borrower to have waited 84 months unless either “extenuating circumstances” can be met ( then its 24 months) OR when ”extenuating circumstances” can’t be met and then what Freddie calls “Financial mismanagement” is assumed and then the timeframe is reduced to 48 months and a list of requirements must be met including a 680 score and a perfect rental history.
- The US Department of Veterans Affairs will allow an eligible Veteran to qualify for a VA loan TYPICALLY two years after discharge date of a Chapter 7 BK. There are guidelines that the VA spells out for a Veteran to qualify between 1 and 2 yrs after discharge date according to Chapter 4 of the VA Lender Handbook: if both of the following are met
- borrower and/or co-borrower have reestablished satisfactory credit, and
- the bankruptcy was caused by circumstances beyond your and/or your spouses control (such as unemployment, medical bills, etc.)
Another situation for a determining that an applicant is a satisfactory credit risk is in situations where the BK was caused by failure of a business of a self-employed applicant and:
- the applicant obtained a permanent position after the business failed,
- there is no derogatory credit information prior to self-employment,
- there is no derogatory credit information subsequent to the bankruptcy, and
- failure of the business was not due to the applicant’s misconduct.
For Chapter 13 BK’s the 2 situations outlined that may conclude a VA lender to extend credit are:
- Satisfactorily making at least 12 months of payments and “permission from the court”
- Finishing all payments satisfactorily
- The USDA (US Department of Agriculture) has a Rural Development program that generally will require a discharge date of 36 months.
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