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Foreclosure, Bankruptcy or Short Sale in Your Past?

Foreclosure, Bankruptcy or Short Sale in Your Past?

You May Qualify For FHA, VA, Fannie Mae, or Freddie Mac Mortgages.

Bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure do not disqualify you from FHA, VA, Fannie Mae, or Freddie Mac mortgages.

However, if you experienced any of these negative events in the last 7 years, you should expect the mortgage originator to ask you for documents regarding the bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure, and more scrutiny from the mortgage underwriting department. Keep in mind that if your had a short sale , or foreclosure the clock starts once the property has come out of your name.

But lender rules regarding recent bankruptcies, short sales, foreclosures, or deeds-in-lieu-of-foreclosure are not the only challenges you will find in qualifying for a mortgage. Mortgage lenders want to see the following four qualities in home loan borrowers:

  1. Positive credit history
  2. Stable income history
  3. Low debt-to-income ratio
  4. Adequate down payment and reserves

Your damaged credit score and financial health are two big hurdles to cross. Let us look at your credit score first.

Credit Score Damage & Recovery

Your first task following a major negative event, is to develop a plan to rebuild your FICO score to a level mortgage lenders use as their minimum threshold. According the FHA, the minimum FICO score it will accept for an FHA-insured loan is 620. Loan originators can require a higher score for FHA loans, and most do. As a practical matter, strive for a 640 or higher FICO score. Why 640? Many lenders consider a 640 the borderline between a prime and subprime borrower, although other factors go into an applicant’s creditworthiness.

Take a hard look at your credit history. Get a no-cost copy of one of your credit reports from AnnualCreditReport.com, and review its contents. Go to www.creditcards.com and request two secure credit cards. Be sure to only apply for the one’s that state they report to all three credit bureuas. Once you receive the cards , use them right way. Only use 30 % of what is available to you , and pay it off that month. Next month , do the same , charge up to 3 % , and pay it off .No single action you take can reverse the damage caused by a bankruptcy, foreclosure, or short sale overnight. Think of your credit report as you would getting into shape physically. Paying your bills on time is like exercising regularly. Keeping your account balances low, which is called credit utilization, is like eating the right amount of food and not over-eating. Paying off old debts is like shedding fat. However , before paying off old debt , contact one of our loan officers to review the debts to see when is the best time to pay these debts. Old debts that get paid will actually drop your scores at first , so we have to create a good game plan.

Make sure you have more than one credit line current. For example, FHA loans generally require a borrower to have two active lines of credit. Ideally, the credit lines should be separate types. A credit type is called a tradeline in the lending business. One type of tradeline is an auto loan. A mortgage is a different tradeline, as is a department store credit card. An example of two separate accounts that are in the same tradeline would be credit cards from Shell Oil and Exxon. The two oil cards would be viewed as a single tradeline, and would not carry the same credit score benefit as an auto loan and a department store credit card, which are viewed as distinct tradelines.

Household Budget

As mentioned at the top of this article, lenders want borrowers who have a positive credit history, stable income history, a low debt-to-income ratio, and adequate down payment and reserves. Creating a household budget prioritizes your expenses. If qualifying for a new mortgage is your top priority, a budget will put you on track to pay off your debts, which lowers your debt-to-income ratio, and help you put aside funds for a down payment.

Waiting Periods For Mortgage Qualification

The circumstances behind your bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure matter.

The FHA, which insures mortgages for investors who put their money into home loans, is in many instances the most tolerant of bankruptcies and foreclosures if the circumstances behind these events were once-in-a-lifetime occurrences beyond the control of the borrower. On the other hand, the FHA flatly disqualifies anyone who short sold an underwater home in an effort to buy a similar home nearby.

Fannie Mae and Freddie Mac have rules similar to the FHA’s. Both are more tolerant of people who strategically defaulted on their underwater homes.

The table below summarizes the 2014 policies of the FHA, VA, Fannie Mae, and Freddie Mac. Like all summaries, this may miss some subtleties found in the rules for each. If you have a recent bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure and have your financial house in order, consult with several lenders to learn if you qualify for a mortgage. If you believe you qualify based on the information shown on this page, contact us prior to looking for a new home.

                                                                                                               

                                                                                                          

Derogatory Event

Waiting Period Requirements

Waiting Period with Extenuating Circumstances

FHA / USDA

Bankruptcy –
Chapter 7 or 11
2 years 1-2 years, and show:
• Bankruptcy was caused by extenuating circumstances beyond his or her control, such as death of wage earner or long-term illness
• Demonstrates ability to manage personal finances responsibly
• Events leading to the bankruptcy are not likely to recur
Bankruptcy –
Chapter 13
2 years 1-2 years, and show:
• One year of the pay-out period under the bankruptcy has elapsed
• All required payments have been made on time, and
• Borrower receives written permission from bankruptcy court
Foreclosure & Deed-in-Lieu of Foreclosure 3 years 3-year requirement is waived if:
• Documented extenuating circumstances beyond his or her control, such as death of wage earner or long-term illness
• Demonstrates ability to manage personal finances responsibly
Short Sale 3 years from the date sale closed and transferred to new owner. Eligible if borrower was current and:
• Mortgage payments on the prior mortgage were current for 12 months prior, and
• Installment debt payments were current for 12 months.
Or, wait 3 years for eligibility if borrower was not current and:
• Default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and
• Demonstrates ability to manage personal finances responsibly

Veterans Administration

Bankruptcy –
Chapter 7 or 13
2 years 1-2 years if
• Borrower establishes satisfactory credit profile, and
• Bankruptcy was caused by circumstances beyond the applicant’s control, such as unemployment, medical bills
Foreclosure 2 years  Ineligible if foreclosure was on VA loan
Deed-in-Lieu of Foreclosure and Preforeclosure Sale 2 years Ineligible if DIL was on VA loan.
Short sale not mentioned

Fannie Mae

Bankruptcy –
Chapter 7 or 11
4 years 2 years
Bankruptcy –
Chapter 13
2 years from discharge date
4 years from dismissal date
2 years from discharge date
2 years from dismissal date
Multiple Bankruptcy Filings 5 years (>1 BK in past 7 years) 3 years from the most recent discharge or dismissal date
Foreclosure 7 years 3 years
Additional requirements after 3 years up to 7 years:
• 90% maximum LTV ratios1
• Purchase, principal residence
• Limited cash-out refinance, all occupancy types
Deed-in-Lieu of Foreclosure and Preforeclosure Sale (short sale) • 2 years — 80% maximum LTV ratios1
• 4 years — 90% maximum LTV ratios1
• 7 years — LTV ratios per the Eligibility Matrix
2 years — 90% maximum LTV ratios1

Freddie Mac

Bankruptcy –
Chapter 7
4 years (one BK)
5 years (>1 BK in past 7 years)
2 years2
Bankruptcy –
Chapter 13
2 years after discharge
4 years after dismissal
5 years (>1 BK in past 7 years)
2 years2
Foreclosure 7 years 3 years2
Deed in Lieu of Foreclosure 4 years 2 years2
Footnote 1: The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios for the transaction per the Fannie Mae Eligibility Matrix.
Footnote 2: Acceptable credit reputation has been reestablished.
Events causing the financial difficulties:
• Were beyond the Borrower’s control,
• Are not ongoing, and
• Are unlikely to recur.

Mortgage waiting periods. Sources: FHA, Fannie Mae, Freddie Mac, VA,

 

 

 

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