One of the concerns a consumer has after
experiencing a bankruptcy, foreclosure, or short sale
(referred to as a "preforeclosure sale" by Fannie Mae)
is the ability to obtain credit to purchase another
home. Fannie Mae has updated its credit
guidelines. This legal article summarizes those
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
representataive 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 (covering the periods prior to, during, and
after a loss of employment), etc.).
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 their 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 ro 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. )
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 faciiate the sale of teh 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 assoicated 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. )
Q 12. How long is the
time period after a bankruptcy (all except
Chapter 13) before a consumer can be eligible
to obtain credit to purchase a property?
A Four
years from the discharge or dismissal date of
the bankruptcy action (Source: FNMA
Announcement 08-16,
6-25-08 ).
Q 13. How long is the
time period after a Chapter 13
bankruptcy before a consumer can be eligible to
obtain credit to purchase a property?
A Two
years from the discharge date and four years
from the dismissal date (Source: FNMA
Announcement 08-16,
6-25-08 ).
Q 14. Does a shorter
time period apply if the borrower has "extenuating
circumstances" that led to the bankruptcy (all
actions)?
A Yes.
Two years from the discharge or
dismissal; however, no exceptions are permitted to the
2-year time period after a Chapter 13 discharge
(Source: FNMA
Announcement 08-16,
6-25-08 ).
See Question 4 for the definition of
"extenuating circumstances."
Q 15. How long is the
time period after multiple bankruptcy
filings before a consumer can be eligible to
obtain credit to purchase a property?
A Five
years from the most recent dismissal or
discharge date for borrowers with more than one
bankrutcy filing within the past 7 years (Source:
FNMA
Announcement 08-16,
6-25-08 ).
Q 16. Does a shorter
time period apply if the borrower has "extenuating
circumstances" that led to the multiple
bankruptcies?
A Yes.
Three years from the most recent
discharge or dismissal date. The most recent
bankruptcy filing must have been the result of
extenuating circumstances. (Source:
FNMA
Announcement 08-16,
6-25-08. )
See Question 4 for the definition of
"extenuating circumstances."
Q 17. What is the
difference between a Chapter 13 bankruptcy and a Chapter
7 bankruptcy?
A Chapter 13
permits a borrower with a regular income to propose a
plan to repay some or all of his or her obligations over
a period of up to five years. A borrower who files
a Chapter 7 is permitted to retain exempt assets and
receive a discharge of the borrower's debts.
Chapter 7 is a relatively quick liquidation process that
is generally completed within 120 days. Chapter 7
cases are rarely dismissed. (Source: FNMA
Announcement 08-16 Q&A,
8-13-08. )
Q 18. What is the
difference between a Chapter 13 dismissal
and a Chapter 13 discharge?
A A borrower
who files a Chapter 13 can dismiss the case at any
time (voluntary dismissal) or the case may be dismissed
by the court based on the borrower's failure to comply
with the requirements of the Bankruptcy Code or to make
the required payments. If the borrower who files a
Chapter 13 case makes all of the payments required by
the plan, the borrower receives a discharge at the end
of the plan. A borrower who doesn't make all the
payment required by the plan may still receive a
discharge if the court finds, among other things, that
the borrower made a certain amount of the payments and
the borrower's failure to make all of the payments was
due to circumstances beyond the borrower's
control. (Source: FNMA
Announcement 08-16 Q&A,
8-13-08. )
Q 19. What are the
requirements to re-establish a credit
history?
A After a
bankruptcy or foreclosure-related action, a credit
history must meet the following rquirements to be
considered re-established:
. It
must meet the requirements for elapsed time (as
discussed in this article.
. It
must reflect that all accounts are current as of the
date of the mortgage application.
. it
must include a minimum of four credit
references. At least one of the references must
be a traditional credit reference, and one of the
references must be housing-related.
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 mortgage payments or rental
payments.
If rental payments wre not reported
to the crdit repositories, the lender must obtain
copies of bank statements, money orders, or cnacled
checks for the most recent 12-mnth period as a
supplement to the rent verification.
. It must
reflect three of the four credit references, including
rental housing references, as active in the 24 months
preceding the date of the mortgage application.
. It must
include no more than two installment or revolving debt
payments 30 days past due in the last 24 months.
. It must
include no installment or revolving debt payments 60
or more days past due since the discharge or dismissal
of the bankruptcy or the completion of the
foreclosure-related action.
. It must
include no housing debt payments past due since the
discharge or dismissal of the bankruptcy or the
completion of the foreclosure-related action.
. It must
include no new public records since the discharge or
dismissal of the bankruptcy or the completion of the
foreclousre-related action. Public records
include bankruptcies, foreclousres, deeds-in-lieu,
preforeclosure sales, unpaid jdugments or collections,
garnishments, liens, etc.
(Source: FNMA Selling
Guide, 4-1-09 at 392. )
Q 20. Where can I get
more
information?
A
Contact Joanne Gardiner, Broker at Advantage
Realty
The information contained herein is
believed accurate as of May 12, 2009. It is
intended to provide general answers to general questions
and is not intended as a substitute for individual legal
advice. Advice in specific situations may differ
depending upon a wide variety of factors. Therefore,
readers with specific legal questions should seek the
advice of an
attorney.
Copyright © 2009 CALIFORNIA ASSOCIATION
OF
REALTORS®
