Bankruptcy, Foreclosure and Short Sales
Many people have recently asked, what are the FHA loan requirements with respect to the waiting period after bankruptcy, foreclosure or a short sale? In answer, here are the FHA guidelines related to bankruptcy, foreclosure and short sales.
Chapter 7 Bankruptcy:
FHA guidelines require that the minimum waiting time is typically no less than two years from the discharge date to obtain an FHA loans. 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 to obtain an FHA loans.
Chapter 13 Bankruptcy:
FHA loan requirements state that a Chapter 13 does not disqualify a borrower from obtaining an FHA loan 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.
Foreclosure:
FHA guidelines state 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 do FHA guidelines determine the date of the foreclosure? The date of a sheriff’s sale? The date of redemption? Paid claim date (if past foreclosure was an FHA loan)?
If the previous foreclosure was not a FHA Home loans, the three year period will typically begin on the date of the sheriff / trustee sale.
If the previous foreclosure was a FHA Home loans, 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.
Pre foreclosure Sale (Short Sale):
FHA loan requirements state that the minimum waiting period is three years for a borrower whose house has been gone through Short Sale or who has given a deed-in-lieu of foreclosure. If the Short Sale 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.
Although this is the official FHA loan requirements, 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.
On June 25, 2008, Fannie Mae introduced policy changes concerning bankruptcy, foreclosure and pre foreclosure 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.
Foreclosure:
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.
Pre foreclosure Sale (Short Sale):
A pre foreclosure sale or short 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.
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