Effects on Credit After Foreclosure, Lose Your House or a Short Sale
One of the concerns a customer has after experiencing a bankruptcy, foreclosure, or short sale (known as a “preforeclosure sale” by Fannie Mae) is the power to get credit to purchase another home.
I. Fannie Mae Credit Guidelines
Question 1. How long is the period of time after a foreclosure before a customer can be eligible to get credit to get a home?
5 years from the date the foreclosure sale was completed. Further wants that apply after 5 years and up to 7 years following the completion date are as follows:
– The purchase of a principal residence is authorized with the minimum 10 % down-payment and minimum representative credit report of 680.
– Purchase of a second home or investment property isn't permitted.
– Limited cash-out refinances are authorized for all occupancy types pursuant to the suitability requirements in effect at that point.
– Cash-out refinances are not authorized for any occupancy type. (Source: FNMA Statement 08-16, 6-25-08)
Question 2. Why do the additional prerequisites for repossessions in Question 1 only apply from 5 to 7 years following the foreclosure completion date?
According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae needs only a 7-year history to be reviewed for all credit and official record info. The 7-year timescale also aligns with the info provided by the borrower on the loan application relative to discovery of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09.)
Query 3. Does a shorter time period apply if the borrower has “extenuating circumstances” that led on to the foreclosure?
Yes. 3 years from the date the foreclosure sale was completed. The same additional necessities apply as listed in Query 1 apart from the minimum credit history of 680 is not required. (Source: FNMA Statement 08-16, 6-25-08.)
Question 4. What are”extenuating circumstances”?
Fannie Mae describes “extenuating circumstances” as follows:
Mitigating circumstances are nonrecurring events that are outside the borrower’s control that result in a sudden, major, and prolonged decrease in income or a cataclysmic increase in financial obligations.
If a borrower claims that prejudiced information is the results of mitigating circumstances, the bank must substantiate the borrower’s claim. Examples of paperwork that can be used to support extenuating circumstances include documents that confirm the event (like a copy of a divorce decree, hospital bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s incapacity to decide the issues that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax assessments (e.g, covering the periods before, during, and after a loss of work).
The bank must acquire a letter from the borrower explaining the relevance of the documentation. The letter must support the allegations of mitigating 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. (Source: FNMA Selling Guide, 4-1-09 at 391.)
Query 5. How long is the period of time after a deed-in-lieu of foreclosure before a shopper can be eligible to obtain credit to purchase a property?
A 4 years from the date the deed-in-lieu was executed. Further wants that apply after 4 years and up to 7 years following the finish date are as follows:
– Borrower may buy a property secured by a principal residence, second home, or investment property with the greater of 10 p.c minimum deposit or the minimum down payment required for the exchange.
– Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that point. (Source: FNMA Announcement 08-16, 6-25-08.)
Question 6. Does a shorter time period apply if the borrower has. “extenuating circumstances” that led on to the deed-in-lieu of foreclosure?
Yes. 2 years from the date the deed-in-lieu was executed. The same further necessities apply as listed in Query 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08.) See Question 4 for the dictionary definition of “extenuating circumstances.”
Question 7. How long is the time period after a “preforeclosure sale” before a client can be accepted to obtain credit to buy a property?
2 years from the finish date. No exceptions are allowed to the 2-year period due to mitigating circumstances. (Source: FNMA Statement 08-16, 6-25-08.)
Query 8. What is a “preforeclosure sale” mentioned in Query 6 and is that the same as a short sale?
“A preforeclosure sale involves the sale of the property by the borrower to an unrelated party for a little less than the sum due to satisfy the delinquent mortgage, as agreed to by the lender, financier, and mortgage insurer” (Source: FNMA Announcement 08-16, 6-25-08). Though the terms preforeclosure sale and short sale have been utilized interchangeably, there's a major difference for the purpose of getting credit. For Fannie Mae purposes, a preforeclosure presupposes that the borrower has been behind in paying their mortgage and the lender consents to accept a smaller amount to bypass the time and cost of a foreclosure action. A short-sale nevertheless , can also refer to eventualities in which the bank of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to help the sale of the property to a third party. (Source: FNMA Statement 08-16 Q&A, 8-13-08.)
Query 9. Does a shorter time period apply if the borrower has “extenuating circumstances” that led straight to the preforeclosure (short) sale?
No. There are no exceptions to the 2-year period of time. (Source: FNMA Statement 08-16, 6-25-08.)
Question 10. If a borrower sold their property as a short sale but was never behind on that mortgage and is now trying to purchase a new primary residence, will Fannie Mae purchase the loan?
The loan will be accepted for delivery to Fannie Mae provided the borrower’s previous mortgage history complies with Fannie Mae’s unjustifiable prior mortgage delinquency policy—that is the borrower hasn't got a few 60-, 90-, 120-, or 150-day delinquencies reported in the 12 months prior to the credit score date—and the borrower has not entered into any contract with the short sale lender to repay any amounts associated with the short sale, including a deficiency judgment. (Source: FNMA Statement 08-16 Q&A, 8-13-08; FNMA Selling Guide, Part X, Chapter 3, Section 302.09.)
Question 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit history?
Preforeclosure sales might be reported as “paid in full” with a “settled for a bit less than owed” remarks code, and the mortgage tradeline would indicate any up to date delinquency. A deed-in-lieu might be reported by a remarks code indicating a deed-in-lieu. (Source: FNMA Announcement 08-16 Q&A, 8-13-08.)
Question 12. How long is the period of time after an insolvency (all except Chapter 13) before a client can be eligible to obtain credit to purchase a property?
Four years from the discharge or dismissal date of the bankruptcy action (Source: FNMA Statement 08-16, 6-25-08).
Question 13. How long is the period of time after a Chapter 13 insolvency before a customer can be eligible to get credit to get a property?
Two years from the discharge date and 4 years from the dismissal date (Source: FNMA Announcement 08-16, 6-25-08).
Query 14. Does a shorter period of time apply if the borrower has “extenuating circumstances” that led straight to the insolvency (all actions)?
Yes. Two years from the discharge or dismissal; nevertheless no exceptions are allowed to the 2-year period of time after a Chapter 13 discharge (Source: FNMA Announcement 08-16, 6-25-08). See Question 4 for the meaning of “extenuating circumstances.”
Question 15. How long is the period of time after multiple bankruptcy filings before a customer can qualify to obtain credit to. Buy a property?
5 years from the latest dismissal or discharge date for borrowers with more than
one insolvency filing in the past 7 years (Source: FNMA Statement 08-16, 6-25-08).
Question 16. Does a shorter time period apply if the borrower has “extenuating circumstances” that led straight to the multiple bankruptcies?
Yes. Three years from the latest discharge or dismissal date. The most recent bankruptcy filing must've been the results of extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08.) See Question 4 for the dictionary definition of “extenuating circumstances.”
Query 17. What is the difference between a Chapter 13 insolvency and a Chapter 7 insolvency?
Chapter 13 allows a borrower with a steady earnings to propose plans to repay some or all of his or her requirements over a period of nearly 5 years. A borrower who files a Chapter 7 is allowed to retain exempt assets and receive a discharge of the borrower’s obligations. Chapter 7 is a comparatively quick liquidation process that is usually finished inside 120 days. Chapter 7 cases are seldom discharged. (Source: FNMA Announcement 08-16 Q&A, 8-13-08.)
Question 18. What's the difference between a Chapter 13 dismissal and a Chapter 13 discharge?
A borrower who files a Chapter 13 can dismiss the case at any point (voluntary dismissal) or the case could be dismissed by the court based mostly on the borrower’s neglecting to obey the prerequisites of the Insolvency Code or to make the necessary payments. If the borrower who files a Chapter 13 case makes all the payments needed by the plan, the borrower receives a discharge at the end of the plan. A borrower who doesn't make all of the payment needed by the plan may still receive a discharge if the court finds, among other stuff, the borrower made a certain quantity of the payments and the borrower’s failure to make all the payments was due to circumstances beyond the borrower’s control. (Source: FNMA Statement 08-16 Q&A, 8-13-08.)
Question 19. What are the requirements to re-establish a credit history?
After an insolvency or foreclosure-related action, a credit score must meet the following
requirements to be considered re-established:
– It must meet the prerequisites for elapsed time (as discussed in this article).
– It must reflect that all accounts are current as of the date of the mortgage application
– It must include at least 4 credit references. At least one of the references must be a normal credit reference, and one of the references must be housing-related.
(1) A housing-related reference must cover the period following the bankruptcy discharge or dismissal, foreclosure, or deed-in-lieu, and can be in the form of home loan payments or rental payments.
(2) If rental payments were not reported to the credit repositories, the bank must get copies of bank records, cash orders, or canceled checks for the most recent 12-month period as a supplement to the rent verification.
– It must reflect three of the four credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.
– It must include no more than 2 installment or rotating debt payments 30 days past due in the last 24 months.
– It must include no installment or revolving debt payments 60 or even more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.
– It must include no housing debt payments past due since the discharge or dismissal of the insolvency or the finishing of the foreclosure-related action.
– It must include no new official documentation since the discharge or dismissal of the bankruptcy or the finishing of the foreclousre-related action. Public records include bankruptcies, repossessions, deeds-in-lieu, preforeclosure sales, delinquent judgments or collections, garnishments, liens, and so on. (Source: FNMA Selling Guide, 4-1-09 at 392.)
II. Bankruptcy, Foreclosure, and Short Sale and the Result on a FICO Score
480.399.0500. Phoenix Credit Correction has been providing credit repair to the Phoenix, AZ area since 1993. To find out more about the easiest way to mend your credit be certain to drop by our internet site at www.PhoenixCreditRepair.org.