Saturday, February 11, 2012

Borrowers Should Be Aware of the Effects Foreclosures, Bankruptcies and Shorts Sales Will Have on Their Credit

For homeowners facing foreclosure or bankruptcy–or considering a short sale of their property to avoid one or both–the effect the action will have on their credit is undoubtedly a huge concern.

Though keeping their homes might not be an option at this point, there could very well be another one in the not-too-distant future, so knowing when they’ll be eligible to qualify for another mortgage is important. 

Be Aware of the Rules of the Road

Earlier this year, Fannie Mae updated its credit guidelines for borrowers who experience one of these circumstances. And, in general, the wait time will now range from two to five years. 

Homeowners who lose their properties to foreclosure or file multiple bankruptcies within a seven-year period will have the longest wait–five years. 

In the case of foreclosure, additional requirements and restrictions will apply after five years and up to seven years as well, which include making a minimum 10% down-payment, having a credit score of at least 680, and having limited cash-out refinance options. Also, the purchase of second homes or investment properties is not permitted. 

A shorter time limit (three years) does apply to both foreclosures and multiple bankruptcy cases if the borrower had what Fannie Mae considers to be “extenuating circumstances” that led to the foreclosure. Of course, the borrower must provide evidence and documentation that the action resulted, from, in their words, “…nonrecurring events…beyond the borrower’s control that result  in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.”  

Borrowers who experience a deed-in-lieu foreclosure must wait the next longest period–four years. However, if they suffered what Fannie Mae considers extenuating circumstances, then they too can qualify to have their waiting period shortened (in this case to two years). 

Bankruptcies–with the exception of Chapter 13 judgments–also mean a four-year wait from the discharge or dismissal date unless–once again–extenuating circumstances apply. In that case, the wait is cut in half to two years as well. 

Two years is the standard waiting period for pre-foreclosure or short sales (whether the mortgage was delinquent or not), as well as Chapter 13 bankruptcy judgments. There are no exceptions permitted for extenuating circumstances, however. 

Requirements to re-establish credit

In all cases, there are several requirements that must be met before credit can be reestablished. These include: 
  • Having all accounts current as of the date of the mortgage application
  • Including a minimum of four credit references (one of which must be housing-related and cover the period following the foreclosure, bankruptcy or short sale)
  • Include no more than two installment or revolving debt payments thirty days past due in the last twenty-four months, or any payments sixty or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action. 
Of course, this is a general overview of Fannie Mae’s new credit guidelines; for more detailed information, please visit their web site
Knowledge is power, and knowing the credit consequences of the various actions mentioned above can help a homeowner in financial trouble decide which course to pursue. As an agent, having this information to pass along to your clients, and having a resources behind you to help keep you updated on the latest legislation and guidelines—as well as help you provide them with foreclosure-prevention options—can help make you their super hero!


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