Buy Sooner if Mortgage Included in Bankruptcy

You can now buy sooner after Guideline changes announced by Fannie Mae on July 29th, 2014.

Fannie Mae has changed the waiting period guidelines to accommodate a much more “make sense” approach to dealing with homeowners that were victims of the economic downturn.

Throughout the years following the worst real estate crash in recent history, tens of thousands of homeowners lost homes to foreclosure, short sale, or deed in lieu of foreclosure.

Many of these distressed homeowners were also forced into filing for Bankruptcy protection to avoid taxation on losses from the forfeit of their home and the double jeopardy of having a subsequent property loss from also showing up on their credit report.

No Penalty for Slow Foreclosure?

Home owners that were approved for a bankruptcy by a Judge in a Federal Court of law, and forfeited the home in the bankruptcy, had expectations that the home would be repossessed by the lender after stopping payments to the bank.

Whether it was that the banks were unprepared, disorganized, or purposely delaying the process, many past homeowners discovered that they still held title to homes forfeited in bankruptcy years ago.

This created another double jeopardy situation that caught everyone by surprise.  While good people that got into unfortunate situations were riding out the waiting period after the bankruptcy, a second waiting period had not even started, or didn’t start until years after the mortgage debt was discharged in the BK.

Foreclosure, Short Sale or Deed in Lieu after BK

Shocked by the fact that they were still on title to a home not lived in or paid on for years, some of these zombie homeowners listed the home for short sale with a local real estate agent in order to get their name off title.

Those lucky enough to do a short sale, or deed in lieu of foreclosure, were at least able to start the clock ticking (again) from the date they were removed from title.  These families are able to buy sooner using conventional financing in 4 years from the date of the short sale, regardless of when the bankruptcy was discharged.

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The lucky ones, that the bank did foreclose, discovered that the foreclosure didn’t take place for sometimes years after the bankruptcy, starting a 7 year clock before being able to buy sooner using a conventional, Fannie Mae loan.

Effective July 29th, 2014, the waiting period was waived for any subsequent foreclosure, short sale, or deed in lieu of foreclosure.

Mortgage debt included in a bankruptcy usually shows up on your credit report as “Included in Chapter (type) Bankruptcy”.  The lender simply needs to verify that the mortgage debt was indeed included in the bankruptcy, and then that your name was removed from title.

Under this scenario, you can buy sooner using conventional financing in 4 years from the discharge date of a Chapter 7 bankruptcy, 2 years from the discharge of a Chapter 13.

What Paperwork Do I Need?

In order to buy sooner after a foreclosure, short sale or deed in lieu, you will need to provide your lender with your bankruptcy discharge papers, including the schedule of debt discharged through the bankruptcy.

If the loan numbers on the bankruptcy discharge papers and the credit report match, you’ve met the qualifying criteria and are able to waive the waiting period of the foreclosure, short sale or deed in lieu.

If you are still living in the home, which means you are still on title, or if you had your loan modified by the lender, you may not have met the criteria that would allow you to buy again.

Extenuating Circumstances

The bankruptcy waiting period is further shortened if the financial hardship that let up to the the bankruptcy, foreclosure, short sale or deed in lieu was caused by circumstances completely outside your control.

While Fannie Mae’s definition of an extenuating circumstance is vague, the underwriting guidelines do list examples of supporting documentation required to prove that the cause of your hardship was caused by events outside of your control.

Following is an excerpt from the Fannie Mae Selling Guide that describes Extenuating Circumstances:

Fannie Mae – Extenuating Circumstances 

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.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. 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 borrower’s 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.).

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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 or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

If you feel that you may be a victim of extenuating circumstances, you must be able to back it up with documentation, as well as provide a detailed letter of explanation about the circumstances, and why they occurred.

Proving extenuating circumstances can be extremely tricky, tedious, and paperwork heavy, but if you do meet these guidelines, your waiting period is shortened to 2 years from the discharge date of your Chapter 7 bankruptcy.

Buy Sooner After Hardship

What is most disturbing about this guidelines change is that very few lenders know about it.  You will need a creative lender with direct access to senior underwriters to be able to go this route.

If you have questions about your waiting period, you can either shoot me an email, call us, or leave a question below.  All questions are followed up on very quickly.