I received a great question this week from one of our readers regarding the waiting period when a foreclosure occurs after a chapter 7 bankruptcy.
I had a Ch7 bankruptcy discharged in Dec 2013 and a foreclosure in Sept 2014. I am looking to refinance and know that I now qualify for an FHA loan since 3 years have passed since my foreclosure but I am getting different answers on when I will be eligible for a Conventional loan.
Some have told me 4 years from bankruptcy (which would be this December) but others have told me it would be 7 years from my foreclosure. If it is in fact 4 years from the bankruptcy, I would wait until December to start the refinancing process and avoid mortgage insurance.
I appreciate your expertise and input. I am located in FL.
Thanks in advance,
The economic down turn caused by the great real estate and mortgage market crash that started in late 2007 left a great number of home owners in a difficult situation, with many falling victim to bankruptcy that included mortgage loans.
In this situation, the foreclosure property was not a primary residence, and was eventually lost to foreclosure almost a year after the discharge of a chapter 7 bankruptcy.
Conventional financing, specifically Fannie Mae underwriting guidelines, were updated in August 2014 that defined what the waiting period is after a financial hardship. These waiting periods tell lenders when you would be eligible to qualify for a new conventional loan.
While the waiting periods are pretty easy to track, there’s always more to the story and every situation is unique as to what happened, what order things happened, and waiting period guideline should be applied.
Add to this the fact that underwriting guidelines are exactly that…a guideline, as opposed to actual rules….And guidelines are open to interpretation.
Here is the actual Fannie Mae underwriting guideline as it appears in the 1,408 page selling guide that instructs lenders on how to underwrite a mortgage application to Fannie Mae standards.
Foreclosure and Bankruptcy on the Same Mortgage
If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied if the lender obtains the appropriate documentation to verify that the mortgage obligation was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.
In Grisel’s case, the mortgage was discharged through the bankruptcy, and then the foreclosure took place 9 months later. The correct answer is that she would be eligible for Conventional financing 4 years from the discharge of the bankruptcy.
The contradicting and inaccurate answer received by multiple other lenders is quite common actually. Many big box lenders will route calls into a call center to be processed like a loan application assembly line. Answers to hard questions that require knowledge of underwriting guidelines are often incomplete, inaccurate, or straight up wrong.
In cases where you are not stuck in a call center, not all lenders follow the same “code” and can interpret the guidelines more conservatively. These lenders choose to not work with consumers that they perceive to be “not easy enough”.
Of course, there is always much more to the story, and everything must be backed up with documentation to show the timing, and course of events. Your mortgage application is still subject to meeting all qualifying requirements once the waiting period has been met.
Bottom line – Just because you read it on the internet or someone on a phone says it’s so….doesn’t necessarily make it true or accurate.
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