The following is important information you should know about obtaining a mortgage after you have experienced financial hardships such as Bankruptcy or Foreclosure. Thank you, Hugh Page of FM Lending for sharing his insightful knowledge!
How Long Do I Have to Wait!
The housing and financial crisis we’ve experienced over the last several years has caused many consumers to experience serious financial hardship. These financial hardships have created an environment where many consumers have been forced to file for bankruptcy protection, and in many cases have ended up losing their homes through foreclosure. To release them of the burden of a home that is “underwater” (owe more on their mortgage than the value), many borrowers have resorted to selling their home in what is called a “Pre-Foreclosure Sale” otherwise known as a “Short Sale”. These derogatory “credit events” have significant ramifications.
Unfortunately, the presence of these significant derogatory credit events tends to dramatically increase the likelihood of a future default and according to these agencies also represents a significantly higher level of risk. For these borrowers the ability to obtain future financing for a mortgage loan is restricted. Fannie Mae, Freddie Mac, FHA, VA, USDA, and all investors who purchase mortgage loans have established strict timelines on the length of time that must elapse before a borrower can obtain a mortgage after experiencing one of these serious “credit events”. Here’s a list of the types of “credit events” and their respective waiting periods:
Bankruptcy (Chapter 7 or Chapter 11)
A four year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action. Exceptions may be allowed if extenuating circumstances can be documented. The four year waiting period is reduced to 2 yrs in this case.
Bankruptcy (Chapter 13)
A distinction is made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The waiting period required for Chapter 13 bankruptcy actions is measured as either 2 yrs for the discharge date or 4 years from the dismissal date. The shorter waiting period based on the discharge date recognizes that borrowers have already met a portion of the waiting period within the time needed for the successful completion of a Chapter 13 plan and subsequent discharge. Again, a 2 year waiting period exception may be permitted if extenuating circumstances can be documented.
Multiple Bankruptcy Filings
For a borrower with more than one bankruptcy filing within the past seven years a five-year waiting period is mandated. Exceptions for extenuating circumstances may be granted after 3 years with documentation of the circumstances.
A seven-year waiting period is required for conventional loans and a three-year waiting period for FHA and USDA loans or for conventional loans with extenuating circumstances that can be documented.
Deed-in-Lieu of Foreclosure and Pre-foreclosure Sale (Short Sale)
These transaction types are completed as alternatives to foreclosure. A deed-in-lieu of foreclosure is a transaction in which the deed to the real property is transferred back to the servicer. A pre-foreclosure sale or short sale is the sale of a property in lieu of a foreclosure resulting in payoff of less than the total amount owed and it is approved by the servicer. This is also known as a “short sale”.
The following waiting periods apply:
|Waiting Period||Additional Requirements|
|Two Years||20% down payment required.|
|Four Years||10% down payment required.|
|Seven Years||Normal Guidelines|
Requirements for Re-establishing Credit
After a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or pre-foreclosure sale, the borrower’s credit needs to be re-established in good standing before they may qualify for another loan. This means the borrower has used credit and paid it back in a satisfactory manner after the derogatory credit event has transpired.
Of course, this post is merely meant to be a guide. If you would like further information about this topic or any other mortgage-related issue, please feel free to contact the experts at FM Lending. They’ll be glad to assist you!