Short Sales, Foreclosures and Bankruptcy-How they impact your credit!

How will a foreclosure, short sale or

bankruptcy affect your ability to

purchase a home?  Below are

some guidelines that lenders follow!

Seasoning means time that must pass!

FHA

 Bankruptcy - Chapter 13 - No seasoning

 Bankruptcy - Chapter 7 – 2 years seasoning from      discharge date

Foreclosures and Short sale – 3 years seasoning from date reported on the credit report.  Possibly less time is required with extenuating circumstances (2 yrs. seasoning is required).  Divorce is not a extenuating circumstance by HUD.

The HUD exception is that borrowers who are forced to move due to a job relocation can be eligible immediately after a short sale provided that there have been no late mortgage payments.

Conventional  loans WITHOUT mortgage insurance

Bankruptcy – 4 years seasoning

Foreclosure - 5 years

Deed- in- lieu of foreclosure – 4 years

Short sales – 2 years seasoning

Conventional loans with Mortgage Insurance

Mortgage Insurance requirements

BK – 4 years seasoning                                                      

Short Sale – 2 years seasoning

Foreclosure – 4-5 years

There can be no late payments since the negative reporting and the FICO score requirements must be met.  Three trade lines with no late payments is highly recommended.

What are extenuating circumstances?  Here is what FNMA says:

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.

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 reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrowers inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property 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 of foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.