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 time period after a foreclosure before a consumer can be accepted to obtain credit to purchase 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 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 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:

Extenuating circumstances are nonrecurring events that are beyond the borrower's control that may result in a unexpected, significant, and lengthened reduction in revenue or a devastating increase in financial commitments.

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.)

Question 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be accepted to get credit to get 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. Two years from the date the deed-in-lieu was executed. The same extra needs apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Statement 08-16, 6-25-08.) See Question 4 for the definition of "extenuating circumstances."

Question 7. How long is the time period after a "preforeclosure sale" before a consumer can be suitable to obtain credit to purchase 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 is a "preforeclosure sale" mentioned 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 a 3rd party for a bit less than the sum owed to satisfy the behind mortgage, as agreed to by the bank, investor, and mortgage insurer" (Source: FNMA Statement 08-16, 6-25-08). Although the terms preforeclosure sale and short sale have been used equivalently, there is a significant difference for the purposes of obtaining credit. For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the bank agrees to accept a lesser amount to avoid the time and expense of a foreclosure action. A short-sale , however , can also refer to circumstances in which the lender of the mortgage consents to a payoff of a smaller amount than is basically owed, even on a current mortgage, to assist the sale of the property to an unrelated party. (Source: FNMA Announcement 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 eligible for delivery to Fannie Mae provided the borrower's previous mortgage history complies with Fannie Mae's excessive prior mortgage delinquency policy—that is the borrower does not have one or two 60-, 90-, 120-, or 150-day delinquencies reported in the 12 months prior to the credit report date—and the borrower has not entered into any accord with the short sale lender to repay any amounts linked 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 score?

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 time period after a Chapter 13 bankruptcy before a consumer can be suitable to obtain credit to buy a property?

Two years from the discharge date and 4 years from the dismissal date (Source: FNMA Announcement 08-16, 6-25-08).

Question 14. Does a shorter time period apply if the borrower has "extenuating circumstances" that led on to the bankruptcy (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 shopper can be eligible to obtain credit to. Get a property?

Five years from the most recent dismissal or discharge date for borrowers with over

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. 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."

Question 17. What's the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

Chapter 13 authorizes a borrower with a regular income to propose a plan to pay back some or all his or her obligations over a period of almost five years. A borrower who files a Chapter 7 is permitted to keep exempt assets and receive a discharge of the borrower's debts. Chapter 7 is a relatively fast liquidation process that's often completed within 120 days. Chapter 7 cases are rarely dismissed. (Source: FNMA Statement 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 may be dismissed by the court based primarily on the borrower's failing to go along with the prerequisites of the Insolvency Code or to make the required 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 amount of the payments and the borrower's failing 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 a bankruptcy or foreclosure-related action, a credit report must meet the following

requirements to be considered re-established:

– It must meet the prerequisites for elapsed time (as discussed in this post).
– It must reflect that all accounts are current as of the date of the mortgage application
– It must include at least 4 credit references. One of the references must be a standard 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 lender must obtain copies of bank statements, money orders, or canceled checks for the latest 12-month period as a supplement to the rent corroboration.

– 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. Insolvency, Foreclosure, and Short Sale and the Impact on a FICO Score

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