Fannie Mae Waives Waiting Period on Foreclosure after Bankruptcy
On July 29th, 2014 Fannie Mae made an unprecedented move to loosen up waiting period for borrowers that included mortgage debt in a bankruptcy.
In a lending environment where it seems banks are less and less willing to lend, this opens up a huge opportunity to the many victims of the economic downturn that began in late 2007, and somewhat continues even today.
Short Sale Waiting Period Changes
The removal of the waiting period for foreclosure, short sale or deed in lieu after bankruptcy seems to be slow to surface due to another “waiting period” change that is scheduled to take place over the weekend of August 16th.
Desktop Underwriter (DU) will be modified to remove the ability to buy again 2 years after a short sale or deed in lieu of foreclosure if you have a 20% down payment and a minimum 680 credit score.
The loan to value requirement will be removed, allowing borrowers to buy with as little as 5% down, however, the waiting period is extended from 2 years to 4 years.
This move creates consistency in Fannie Mae’s waiting period policy to 4 years across the board for any default included in a bankruptcy, short sold, or transferred back to the lender through a deed in lieu of foreclosure.
Borrowers No Longer Punished for Lender Delays
Mortgage debt included in bankruptcy, in the eyes of many, meant that you are “giving the house back to the bank”. The shocking reality was that most banks did not foreclose immediately, and in most cases, not for years.
For those that remained in the home, this seemed like a blessing in disguise because you were able to live in your home for years without making payments. The harsh reality of that soon crept into this scenario is that once the bank finally does “take the home back”, a new waiting period began from the date your name is removed from title.
I have seen this process take as long as 5 years after the bankruptcy discharge, and from the last payment was sent. What this meant was that now you’re adding an additional 7 year waiting period after already waiting 5 years from the bankruptcy discharge.
In the above scenario, a hard working family that experienced a financial hardship is penalized for 11 years before they are able to become homeowners again.
I guess this falls into the category of better late than never, and fortunately Fannie Mae had the good sense to understand that many of the challenges that homeowner’s had were not necessarily due to financial mismanagement, but financial hardship due to the implosion of the housing industry.
The above waiting period changes are cut in half to 2 years if the financial hardship was the result of a circumstance outside of the homeowner’s control. Examples of extenuating circumstances can include job loss, layoff, permanent disability or the death of a wage earner.
While extenuating circumstances are considered to be very difficult to prove, income reduction or loss due to economic conditions is not as difficult to document.
If you believe that your financial hardship can be documented, and you can show a series of financial hardships that led to an eventual bankruptcy, or inability to sell your home due to plummeting home values, you may have a case worth fighting for.
Exceptions to Waiting Periods
The waiting period after a foreclosure on a home that was not included in a bankruptcy is still subject to a 7 year waiting period from the date that your name was removed from title.
The elimination of the 20% downpayment option after 2 years will take effect on any loan applications taken after August 16th, 2014.
I understand that the timeline does not give you much time to prepare, but if you were considering buying 2 years from a short sale or deed in lieu of foreclosure, you need to complete a loan application before August 16th, 2014.
Finding an Experienced Lender
The biggest challenge we are seeing now is that most lenders do not understand this, or will not take the time to research this guideline. The simple fact is that for most lenders, this is a “one-off” scenario, and they do not thing it’s worth the time or effort to figure out how to help homebuyers with past financial hardship.
Do not take “NO” for an answer – I have a network of lender friends across the Country that understand these guidelines, and can help.
If you still have questions, leave me a comment below, shoot me an email or give us a call and we can point you in the right direction.