How long will I need to wait to be able to apply for credit again if I had a foreclosure or short sale? How will a foreclosure vs. short sale impact my ability to purchase a home again?
Many home owners are in financial distress and are facing foreclosure. A foreclosure process begins when a property owner is behind on their mortgage payments. Usually after 90 days of missed payments, the lender will file a Notice of Default and it spirals down from there.
READ MORE: Foreclosure Process Steps
If a home owner is unable to make the lender whole or renegotiate their loan (called loan modification) where they can reasonably make their payments, a short sale becomes an option. In a short sale, a home owner usually hires a real estate agent to negotiate with the bank or banks to accept less than what is owed on the house upon sale.
READ MORE: Understanding Short Sales
Whatever the scenario – foreclosure or a short sale, here’re some important guidelines to understand. A big thanks goes out to www.bubbleinfo.com for putting together this informative guide!
FORECLOSURE CREDIT ISSUES
I. Fannie Mae Credit Guidelines
Q 1. How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?
A Five years from the date the foreclosure sale was completed.
Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:
. The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum representative credit score of 680.
. Purchase of a second home or investment property is not permitted.
. Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.
. Cash-out refinances are not permitted for any occupancy type.
(Source: FNMA Announcement 08-16, 6-25-08 )
Q 2. Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?
A 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 information provided by the borrower on the loan application relative to disclosure of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09. )
Q 3. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the foreclosure?
A Yes. Three years from the date the foreclosure sale was completed. The same additional requirements apply as listed in Question 1 except the minimum credit score of 680 is not required. (Source: FNMA Announcement 08-16, 6-25-08. )
Q 4. What are”extenuating circumstances” ?
A Fannie Mae describes “extenuating circumstances” as follows:
Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems 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 prior to, during, and after a loss of employment).
The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating 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 his or her financial obligations.
(Source: FNMA Selling Guide, 4-1-09 at 391. )
Q 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?
A Four years from the date the deed-in-lieu was executed.
Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows:
. Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction.
. 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 time.
(Source: FNMA Announcement 08-16, 6-25-08. )
Q 6. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the deed-in-lieu of foreclosure?
A Yes. Two 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 definition of “extenuating circumstances.”
Q 7. How long is the time period after a ”preforeclosure sale” before a consumer can be eligible to obtain credit to purchase a property?
A 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. )
Short Sale Guidelines
Q 8. What is a “preforeclosure sale” mentioned in Question 6 and is that the same as a short sale?
A ”A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer” (Source: FNMA Announcement 08-16, 6-25-08 ).
Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for 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 lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action. A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )
Q 9. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the preforeclosure (short) sale?
A No. There are no exceptions to the 2-year time period. (Source: FNMA Announcement 08-16, 6-25-08. )
Q 10. If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?
A The loan will be eligible for delivery to Fannie Mae provided that 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 more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date–and the borrower has not entered into any agreement with the short sale lender to repay any amounts associated 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. .)
Q 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit report?
A Preforeclosure sales may be reported as “paid in full” with a “settled for 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. )
Please consult your attorney for specific questions and additional information. This article is not meant to provide legal advice and should not be construed as such.