Bankruptcy, Foreclosure and Short Sales

Many people have recently asked what is the FHA waiting period after bankuptcy, foreclosure or a short sale. In answer, here are the FHA guidelines related to bankruptcy, foreclosure and short sales.

Chapter 7 Bankruptcy:
FHA requires that the minimum waiting time is typically no less than two years from the discharge date. In addition, the borrower must have reestablished good credit or chosen to not incur new credit obligations.
If the borrower can show that the bankruptcy was caused by extenuating circumstances beyond the borrower’s control and that he or she has since demonstrated a documented ability to manage his or her financial affairs, the waiting period can be reduced to one year.

Chapter 13 Bankruptcy:
FHA states that a Chapter 13 does not disqualify a borrower from obtaining FHA financing as long as the borrower can show that at least one year of the pay-out period has elapsed under the plan and that all of the required payments (and mortgage payments when applicable) have been made on time. Also, the borrower must receive permission from the court to enter into the mortgage transaction.

FHA states that the minimum waiting period is three years for a borrower whose house has been foreclosed or who has given a deed-in-lieu of foreclosure. If the foreclosure was the result of a documented extenuating circumstances that were beyond the control of the borrower and the borrower has reestablished good credit since the foreclosure the three year waiting period may be waived. Extenuating circumstances include serious illness or death of a wage earner.

It has been asked, How does FHA determine the date of the foreclosure? Sheriff’s sale? redemption? paid claim date (if past foreclosure was FHA)?

If the previous foreclosure was not a FHA-insured mortgage, the three year period will typically begin on the date of the sheriff / trustee sale.

If the previous foreclosure was a FHA-insured mortgage, it will be reported on HUD’s Credit Alert Interactive Voice Response System (CAIVRS). CAIVRS is a Federal government-wide repository of information on those individuals with delinquent or defaulted Federal debt and on those for whom a payment of an insurance claim has occurred. In these cases, the three year exclusion period starts from the date that the claim was paid corresponding to the previous foreclosure. That date will need to be obtained from HUD.

Preforeclosure Sale (Short Sale):
FHA does not currently have a policy regarding the time required to reestablish credit and obtain a new FHA loan after a short sale. However, the borrower must be able to qualify using standard FHA guidelines including the fact that they typically can not have any late payments on their mortgage for the previous 12 months.

Although this is the official FHA policy, many lenders have heard that FHA currently will not insure a new loan application from a borrower with a short sale that is less than three years old.  Many of the individual banks and lenders have implemented their own policies regarding the waiting period after a short sale. I have seen a typical range between two and four years.  We anticipate that FHA will issue a written policy regarding short sales with more liberal guidelines in the near future.  Contact me with additional questions.

I read an interesting article recently, What Life is Like After Foreclosure, that discussed the challenges that many people face after they have experienced a foreclosure. These challenges range from struggling to find a home to rent, coming up with the initial cash requirement to rent the home, increased interest rates on other consumer credit, and finally, the fact that many people will have to wait numerous years to rehabilitate their credit scores and meet the requirements to qualify to purchase a new home. Here is an excerpt from the article.

These days, record-breaking foreclosure statistics are coming out with numbing frequency. But what happens to the thousands of families after their personal financial disaster is added to the mounting national count?

Unfortunately, once a foreclosure is final, the financial and emotional upheaval is far from over.

While there’s considerable pain, most foreclosure victims will eventually become homeowners again, says Jay Zagorsky, a research scientist at Ohio State University.

Still, that won’t happen anytime soon, especially since mortgage rule maker Fannie Mae has recently lengthened the time that must lapse between a foreclosure and approval for a new mortgage.

Since the article mentioned Fannie Mae’s new policy changes, I thought that I would provide a more in-depth review of these changes.

On June 25, 2008, Fannie Mae introduced policy changes concerning bankruptcy, foreclosure and preforeclosure sales (short sales). These policies were made effective as of August 1, 2008. It should be noted that these policy changes are currently exclusive to Fannie Mae, but they may soon be implemented (either partially or entirely) by Freddie Mac and FHA.

Here is an overview.

Bankruptcy (All Except Chapter 13):
New requirements state that the four year waiting period remains the same but will now be applied from either the discharge or dismissal date of the bankruptcy action.

Chapter 13 Bankruptcy:
New requirements state that although the waiting period from the discharge date remains the same, if the bankruptcy is dismissed, the waiting period increases to four years.

Exceptions for Extenuating Circumstances (All Bankruptcy Actions):
If there are extenuating circumstances that warrant an exception to the four year waiting period, the waiting period is reduced to no less than two years from the discharge or dismissal date.

Multiple Bankruptcy Filings:
A five year waiting period is now required to reestablish credit from the most recent discharge or dismissal date for borrowers who have more than one bankruptcy filing in the past seven years.

Exceptions for Extenuating Circumstances (Multiple Bankruptcy Filings):
If there are extenuating circumstances that warrant an exception to the five year waiting period, the waiting period is reduced to no less than three years from the discharge or dismissal date. Note that the most recent bankruptcy filing must have been the result of extenuating circumstances.

The minimum waiting period has been increased from four years to five years following the date that the foreclosure sale was completed (completion date). In addition for borrowers wishing to purchase a home after five years and up to seven years following the completion date, the minimum down payment on a primary residence is 10 percent and the minimum credit score is 680. During this time period, the purchase of a second home or investment property and cash-out refinances is not permitted.

Exceptions for Extenuating Circumstances (Foreclosure):
If there are extenuating circumstances that warrant an exception to the five year waiting period, the waiting period is reduced to no less than three years from the completion date. Apart from not requiring the minimum credit score of 680, the same additional requirements mentioned above apply between the third and seventh year after the completion date.

Preforeclosure Sale (Short Sale):
A preforeclosure sale involves the sale of a property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Fannie Mae now requires a two year waiting period to reestablish credit following the sale of the property.

Please note that FHA has more flexible policies regarding these matters than Conventional Loans. If you have any questions, please contact me.