Since late 2007 and the MORTGAGE MELTDOWN started we’ve had many “inquiries” from prospective MN & WI buyers who’ve wanted to get into a new home or BACK into home ownership. The last couple years have been hard on many people even though the Federal Government says that the recession is behind us. People have had their incomes cut back, lost jobs, bankruptcies, foreclosures and short sales.
What I wanted to share with you is a current (as of today) crib sheet of how long certain negative things need to be “seasoned” before different types of mortgage financing can be offered.
Let’s get a list of different SITUATIONS or EVENTS and follow up with what the seasoning requirements may be for different types of financing options:
The two most common types of bankruptcy (BK) are the Chapter 7 (liquidation) and the Chapter 13 (reorganization).
- FHA will need a Chapter 7 BK to be dismissed 24 months (or 1 year for someone who’s eligible for the Back to Work program). Someone who is IN a Chapter 13 and is in the process of REPAYING their debts can qualify for a FHA loan after 12 months of proof of repayment, no “lates” on anything on their credit report AND “permission from the court”.
- Conventional Financing with the Federal National Mortgage Association (FNMA/Fannie Mae) after a Chapter 7 is allowed after 48 months from the discharge/dismissal date. A two-year waiting period is allowed if certain “extenuating circumstances” can be documented. The time is extended to 60 months if there is more than one BK within the last 7 yrs.
- Conventional Financing with the Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac) will generally require a borrower to have waited 84 months unless either “extenuating circumstances” can be met ( then its 24 months) OR when “extenuating circumstances” can’t be met and then what Freddie calls “Financial mismanagement” is assumed and then the timeframe is reduced to 48 months and a list of requirements must be met including a 680 score and a perfect rental history.
- The US Department of Veterans Affairs will allow an eligible Veteran to qualify for a VA loanTYPICALLY two years after discharge date of a Chapter 7 BK. There are guidelines that the VA spells out for a Veteran to qualify between 1 and 2 yrs after discharge date according to Chapter 4 of the VA Lender Handbook: if both of the following are met
- borrower and/or co-borrower have reestablished satisfactory credit, and
- the bankruptcy was caused by circumstances beyond your and/or your spouses control (such as unemployment, medical bills, etc.)
Another situation for a determining that an applicant is a satisfactory credit risk is in situations where the BK was caused by failure of a business of a self-employed applicant and:
- the applicant obtained a permanent position after the business failed,
- there is no derogatory credit information prior to self-employment,
- there is no derogatory credit information subsequent to the bankruptcy, and
- failure of the business was not due to the applicant’s misconduct.
For Chapter 13 BK’s the 2 situations outlined that may conclude a VA lender to extend credit are :
- Satisfactorily making at least 12 months of payments and “permission from the court”
- Finishing all payments satisfactorily
- The USDA (US Department of Agriculture) has a Rural Development program that generally will require a discharge date of 36 months.
A foreclosure is the legal process by which a mortgagee (typically a bank) obtains a court ordered termination of the home-owners “equitable right of redemption”.
- FHA requires a 36 months seasoning (or 1 year for someone who’s eligible for the Back to Work program)
- Fannie Mae and/or Freddie Mac require 84 months (SEVEN YEARS) from the completion of the Foreclosure for the Date of the credit pull for the new loan. The old “between 5 and 7 year rule” was changed effective October of 2010. Now there is a 3 yr “extenuating circumstance” rule (90% LTV for a primary residence) with Fannie Mae and its at only 2 yrs with Freddie Mac.
- VA follows their guidelines for a Chapter 7 BK with the request that the complete facts / circumstances of the Foreclosure be submitted AND if the Foreclosure was on a VA loan note that “full entitlement” will not be available for the new loan.
- USDA generally requires 36 months OR if after 12 months, reestablished credit and an underwriter “waiver”. This is completely up to the discretion of the u/w… do you have a good one?
A Short Sale is an option of a homeowner selling a home for less than the balance on their current mortgages and the mortgagee agrees to a reduced payoff. The bank’s decision to allow a Short Sale is typically in lieu of the foreclosure process which can result in heft fees for the bank. This process and agreement does not necessarily release the homeowner from the obligation to pay the remaining balance of the loan known as the DEFICIENCY.
- FHA requires 36 months in most situations. If CERTAIN GUIDELINES are met that follow Mortgagee Letter 09-52… the homeowner could qualify for an immediate purchase. Did you catch that… RIGHT AWAY. This is an important guideline change that is often misunderstood. Another complicated option is the FHA Back to Work program that allows for a purchase after 1 year even if there were late payments on the mortgage against the property previously sold short.
- Fannie Mae guidelines right now require a 72 month seasoning for FULL ELIGIBILITY. After 24 months… a borrower could qualify with at least 20% down and after 48 months the maximum LTV is 90%. Their “extenuating circumstances” rule may allow someone to only have to put 10% down in as little as 2 yrs.
- Freddie Mac is sticking to their 48 month seasoning… or 24 months if their “extenuating circumstances” guidelines can be proven/met.
- VA guidelines that we’ve seen have looked very similar to FHA’s above; 36 months OR if after 12 months and fitting the similar new guidelines of ML 09-52.
- USDA generally requires 36 months OR with the right underwriter’s “waiver” and approval.
Did you get all that? Its pretty crazy and you can see that things are VERY DIFFERENT now and the job of a “mortgage guy” (and a Realtor) is to know more than just “what’s the rate and fees”? These guidelines are effective TODAY and changed a few times in the past year.
We have to educate consumers who are current home-owners that are in tough situations (ask me about the “Upside Down Playbook”) along with shoppers who have fallen into Hardships. The toughest part of our jobs right now is telling people what they NEED TO KNOW and not just what they WANT TO HEAR. The hope is that the knowledge from the paragraphs above will help you shine and win more referrals and future business.
One big TAKE AWAY is that with Conventional Financing’s standard guidelines… if a customer WALKS on their home and lets it go into a Foreclosure they’ll have to wait SEVEN YEARS to get a loan. If they work with a trained REO Realtor to structure a Short Sale they could only have to wait 2 years or qualify IMMEDIATELY with an FHA loan. Partnering with a good, educated LO can make all the difference.