Effects on Credit After Foreclosure, Insolvency or a Short Sale

One of the concerns a patron has after experiencing an insolvency, foreclosure, or short sale (called a \”preforeclosure sale\” by Fannie Mae) is the facility to obtain credit to buy 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 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.)

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 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:

Extenuating circumstances are nonrecurring events that are beyond the borrower\’s control ending up in a unexpected, important, and extended reduction in earnings or a catastrophic increase in financing responsibilities.

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 additional requirements apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08.) See Question 4 for the meaning 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?

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 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.)

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 trying to purchase 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 time period after a bankruptcy (all except Chapter 13) before a consumer can qualify to get credit to get 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?

2 years from the discharge date and four years from the dismissal date (Source: FNMA Statement 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; however , no exceptions are permitted to the 2-year time period after a Chapter 13 discharge (Source: FNMA Statement 08-16, 6-25-08). See Question 4 for the dictionary definition of \”extenuating circumstances.\”

Question 15. How long is the time period after multiple insolvency filings before a consumer can be suitable to get credit to. Purchase 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.)

Query 18. What is 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 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 3 of the 4 credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.
– It must include less than two installment or revolving debt payments 30 days past due in the last 24 months.
– It must include no installment or rotating debt payments 60 or more days past due since the discharge or dismissal of the insolvency or the completing of the foreclosure-related action.
– It must include no housing debt payments past due since the discharge or dismissal of the bankruptcy or the conclusion of the foreclosure-related action.
– It must include no new public documentation since the discharge or dismissal of the insolvency or the conclusion of the foreclousre-related action. Public documentation include bankruptcies, repos, deeds-in-lieu, preforeclosure sales, unpaid judgments or collections, garnishments, liens, etc. (Source: FNMA Selling Guide, 4-1-09 at 392.)

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

480.399.0500. Phoenix Credit Fixing has been providing credit correction to the Phoenix, AZ area since 1993. To learn more about how to fix your credit be sure to drop by our site at www.PhoenixCreditRepair.org.

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