Effects on Credit After Foreclosure, Bankruptcy or a Short Sale

One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale (referred to as a “preforeclosure sale” by Fannie Mae) is the ability to get credit to get 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. Extra necessities that apply after 5 years and up to 7 years following the completion date are as follows:

– The acquisition of a principal residence is allowed with a minimum 10 p.c down payment and minimum representative credit score of 680.
– Purchase of a second home or investment property is not authorized.
– Limited cash-out refinances are allowed for all occupancy types pursuant to the eligibility needs in effect at that time.
– Cash-out refinances aren't allowed for any occupancy type. (Source: FNMA Announcement 08-16, 6-25-08)

Question 2. Why do the extra requirements for repos in Question 1 only apply from 5 to 7 years following the foreclosure finish date?

According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires only a 7-year history to be reviewed for all credit and public record information. The 7-year timeframe also aligns with the data offered by the borrower on the loan application relative to declaration of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09.)

Question 3. Does a shorter period of time apply if the borrower has “extenuating circumstances” that led straight to the foreclosure?

Yes. 3 years from the date the foreclosure sale was completed. The same extra requirements apply as listed in Question 1 except the minimum credit report 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 insulting 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, medical bills, notice of job layoff, job severance papers, and so on.) and documents that demonstrate factors that contributed to the borrower’s disability to solve the issues that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (e.g, covering the periods before, during, and after a loss of work).

The bank must obtain a letter from the borrower explaining the significance of the documentation. The letter must support the assertions of mitigating circumstances, confirm the nature of the event that led straight to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options aside from to renege on their finance responsibilities. (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 Four years from the date the deed-in-lieu was executed. Extra needs that apply after 4 years and up to 7 years following the completion 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.)

Query 6. Does a shorter time period apply if the borrower has. “extenuating circumstances” that led straight 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 period of time after a “preforeclosure sale” before a purchaser can be eligible to get credit to get a property?

Two years from the completion date. No exceptions are permitted to the 2-year period due to extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08.)

Question 8. What's a “preforeclosure sale” discussed in Question 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.)

Question 9. Does a shorter period of time apply if the borrower has “extenuating circumstances” that led to the preforeclosure (short) sale?

No. There aren't any exceptions to the 2-year time period. (Source: FNMA Announcement 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 attempting to get a new primary residence, will Fannie Mae purchase the loan?

The loan will have eligibility for delivery to Fannie Mae provided that the borrower’s prior mortgage history complies with Fannie Mae’s disproportionate previous mortgage delinquency policy—that is the borrower doesn't have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months before the credit history date—and the borrower hasn't entered into any agreement with the short sale bank to reimburse any amounts connected with the short sale, including a deficiency judgment. (Source: FNMA Announcement 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 score?

Preforeclosure sales could be reported as “paid in full” with a “settled for a bit less than owed” remarks code, and the mortgage tradeline would indicate any recent delinquency. A deed-in-lieu may 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 purchaser can be accepted to get credit to purchase 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. 2 years from the discharge or dismissal; but no exceptions are permitted to the 2-year time period after a Chapter 13 discharge (Source: FNMA Statement 08-16, 6-25-08). See Query 4 for the definition of “extenuating circumstances.”

Question 15. How long is the period of time after multiple bankruptcy filings before a shopper can be eligible to obtain credit to. Get a property?

5 years from the latest dismissal or discharge date for borrowers with more than

one bankruptcy filing within the past 7 years (Source: FNMA Announcement 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. 3 years from the most recent discharge or dismissal date. The latest insolvency filing must have been the result of mitigating circumstances. (Source: FNMA Statement 08-16, 6-25-08.) See Question 4 for the 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 time (voluntary dismissal) or the case might be discharged by the court based on the borrower’s failure to comply with the requirements of the Bankruptcy Code or to make the mandatory payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan. A borrower who does not make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a specific amount of the payments and the borrower’s neglecting to make all of the payments was due to circumstances outside the borrower’s control. (Source: FNMA Announcement 08-16 Q&A, 8-13-08.)

Query 19. What are the prerequisites to re-establish a credit report?

After an insolvency or foreclosure-related action, a credit history must meet the following

requirements to be considered re-established:

– It must meet the requirements for elapsed time (as debated in this piece).
– It must reflect that all accounts are current as of the date of the mortgage application
– It must include a minimum of four credit references. 1 of the references must be a traditional 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.