Mortgage Loan Interval Qualifying Guidelines Following Financial Hardship

 

In light of August, 2014 changes made to Fannie Mae’s mortgage loan waiting policy for borrowers who have experienced a short sale, we felt it would be useful to review the mortgage loan interval qualifying guidelines following a financial hardship event for the most popular mortgage loan programs.

Please see the table below.

Mortgage Loan Interval Qualifying Guidelines Following Financial Hardship as of January, 2015

 

Conventional

Event

Fannie Mae

Freddie Mac with Financial Mismanagement

Freddie Mac with Extenuating Circumstances

FHA

VA

USDA9

Foreclosure

7 Years Following Foreclosure1

7 Years Following Foreclosure

3 Years Following Foreclosure

3 Years Following Foreclosure4

2 Years Following Foreclosure8

3 Years Following Foreclosure

Short Sale

4 Years Following Short Sale2

4 Years Following Short Sale

2 Years Following Short Sale

3 Years Following Short Sale4,5

2 Years Following Short Sale

3 Years Following Short Sale

Chapter 7 or 11 Bankruptcy

4 Years Following Chapter 7 or 11 Bankruptcy2

4 Years Following Chapter 7 or 11 Bankruptcy

2 Years Following any Bankruptcy

2 Years Following Chapter 7 Discharge6

2 Years Following Chapter 7 Bankruptcy8

3 Years Following Chapter 7 Discharge

Chapter 13 Bankruptcy

2 Years Following Discharge

4 Years Following Dismissal2

2 Years Following Discharge

4 Years Following Dismissal

2 Years Following any Bankruptcy

2 Years Following Chapter 13 Discharge7

1 Year Following Chapter 13 Bankruptcy8

1 Year Following Chapter 13 Discharge

Multiple Bankruptcy Filings in past 7 Years

5 Years Following most recent Dismissal or Discharge3

5 Years Following most recent Dismissal or Discharge

2 Years Following any Bankruptcy

N/A

N/A

N/A

Other Significant Adverse or Derogatory Credit Info

N/A

4 Years from the most recent event

2 Years from the most recent event

N/A

N/A

N/A

1 If the buyer is able to prove extenuating circumstances, Fannie Mae may qualify the buyer to repurchase using conventional financing after only three years; additional requirements after three years up to seven years:

  1. 90% Maximum LTV ratios

  2. Purchase for principal residence

  3. Limited cash-out refinance for all occupancy types

2 If the buyer is able to prove extenuating circumstances, Fannie Mae may qualify the buyer to repurchase using conventional financing after only two years.

3 If the buyer is able to prove extenuating circumstances for the most recent bankruptcy, Fannie Mae may qualify the buyer to repurchase using conventional financing after only three years.

4 Exception: The lender may grant an exception to the three-year requirement if the foreclosure or short sale was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure.

5 Borrower current at the time of short sale: A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and installment debt payments for the same time period were also made within the month due.

6An elapsed period of less than two years, but not less than twelve months, may be acceptable for an FHA-insured mortgage, if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note: the lender must document that the borrower's current situation indicates that the events which led to the bankruptcy are not likely to recur.

7A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that one year of the pay-out period under the bankruptcy has elapsed, the borrower’s payment performance has been satisfactory, all required payments have been made on time, and the borrower has received written permission from the bankruptcy court to enter into the mortgage transaction.

Click the following link for additional information: 

https://portal.hud.gov/hudportal/documents/huddoc?id=4155-1_4_secC.pdf

8 Foreclosure (and deed in lieu of foreclosure) – Per VA guidelines, in order to meet satisfactory credit risk in the 1-2 year period after a foreclosure, the lender must follow bankruptcy guidelines. Bankruptcy guidelines are: If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:

The applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and

The bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse

If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if:

  • The applicant obtained a permanent position after the business failed, and

  • There is no derogatory credit information prior to self-employment, and

  • There is no derogatory credit information subsequent to the bankruptcy, and

  • Failure of the business was not due to the applicant’s misconduct.

Click the following link for additional information: 

https://www.benefits.va.gov/warms/pam26_7.asp

9 Adverse credit waivers may be granted for USDA buyers if there were mitigating factors beyond the buyer’s control and those factors are documented and have been removed.

As an example, if the circumstances causing the adverse credit were beyond the applicant’s control and temporary in nature, such as increased expenses due to illness and/or medical expenses, injury, death, etc., and those circumstances are no longer a factor, there may be justification for an adverse credit waiver.

Click the following link for additional information:

https://www.rurdev.usda.gov/supportdocuments/ca-sfh-grhunderwritingguide.pdf

Regardless of their former financial situation, it is important for those looking to re-enter the housing market to re-establish their credit again as quickly as possible following their hardship. They should start by obtaining a copy of their credit report, then contact a mortgage professional for guidance in rebuilding their credit score and to obtain additional information for help in determining their eligibility for a mortgage loan.

nestablish.com