Waiting Periods After Short Sale, Foreclosure, Bankruptcy

I wrote recently about Fannie Mae’s announcement regarding the extension of the waiting period for those Buyers hoping to become Homeowners once again after having experienced a Short Sales (Pre-Foreclosures).

The waiting period is now extended out to 4 years … regardless of Loan-to-Value considerations (or Down Payment percentages).Extenuating circumstances after a short sale or bankruptcy

Naturally, there’s been a wide range of reaction to Fannie Mae’s announcement.  There’s also been many questions asked in regards to this change and my post.  So, I’m addressing some those questions here.

I’m also featuring information regarding those exceptions seen as viable hardships/options for Short Sales … and the financing options that remain available for new potential Home Buyers having faced this situation.

Quite a few questions were raised regarding FHA and VA waiting periods.  Both FHA and VA have shorter waiting periods.
 
     As a general rule: 

  • VA allows financing two (2) years after a Short Sale
  • FHA requires a three (3) year waiting period

Exceptions to the rules include:

  • Shorter waiting periods for VA and FHA loans are possible, if the Mortgage Payment History is perfect (NO late payments).  But this rarely occurs.
  • Conventional Loans can be achieved two (2) years out AFTER an Extenuating Circumstance.

    An Extentuating Circumstance is defined by Fannie Mae as:

    B3-5.3-08: Extenuating Circumstances for Derogatory Credit (04/01/2009)

    Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. 

    If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.). 

    The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations. 

    Extenuating circumstances after a short sale or bankruptcy FHA back-to-work programFHA also has a One-Year (1) “Back to Work” Program, (see my post “Good News for Many Hopeful 2014 Home Buyers: FHA’s “Back to Work – Extenuating Circumstances” Program), which allows financing after a significant economic event. Think:  Job Loss, company shut-down, significant pay-cuts.
    I obviously can’t address all the many and different possibilities and individual scenarios that customers might face within this post.  But I do want to stress this important fact:  Each situation is unique.  Each situation is subject to review.  And that’s good news!  
    Why?   
     
    Because that means there’s no blanket ready-made decision regarding a customer’s individual financial situation.  Each potential Buyer has the opportunity to fully-explain their personal “Extenuating Circumstances” and prove that moving forward, they’ll be a responsible Mortgage holder that meets their monthly Mortgage Payment obligations.
     
    Waiting Periods and Extenuating Circumstances After a Short Sale, Foreclosure, Bankruptcy  … Bottomline:  Ever-changing guidelines make it vitally important that Buyers/Borrowers find and work with an experienced, knowledgeable, and resourceful Loan Officer when considering a Mortgage.  
    This is especially true when they’ve previously faced the challenges of a Short Sale, Foreclosure, Deed-in-Lieu of, Bankruptcy, or any other significant credit challenge.  

Gene Mundt

I am a 30+ year veteran of the mortgage/banking industry, with extensive knowledge and experience in mortgage and credit services, management, and real estate appraising. I am also an IL Certified Financial Planner. This unique combination of education, experience, and expertise affords me more complete and in-depth resources from which to service my clients and their needs.

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