Short Sale Waiting Period Waived if Included in Bankruptcy?
Changes to the waiting period for mortgage debt that was discharged through bankruptcy took place over the weekend of August 16th, 2014.
You are now able to purchase a home using conventional financing 4 years from the discharge date of a Chapter 7 Bankruptcy discharge, regardless of when the short sale takes place.
One of the biggest challenges we’ve encountered since this guideline change went into effect, is that the wording does not actually mention short sale, or deed in lieu for foreclosure at all.
Here is the actual wording new waiting period guideline:
Foreclosure and Bankruptcy on the Same Mortgage
If a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting period 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.
I found this to be inconsistent with Fannie Mae’s present stance on short sale or deed in lieu of foreclosure when they reduced the waiting period to 4 years from the date of the event, keeping the waiting period of 7 years from the date of a foreclosure.
If Fannie Mae considers a short sale or deed in lieu of foreclosure as an event not quite as serious as a foreclosure, then why would they specifically leave out these events in this new guideline?
What Lenders Don’t Know
Lenders nationwide are using a literal interpretation of this guideline only applying the bankruptcy waiting period to loan applications that experienced a foreclosure after the discharge.
I get calls, emails and comments almost every day from homebuyers trying to purchase after a short sale that was discharged through bankruptcy.
Unfortunately, these lenders do not have the experience, or desire to explore this guideline, and are telling potential buyers that they must wait 4 years from the short sale date. These lenders are wrong.
If you’re reading this article now, hopefully it’s because you didn’t take “NO” for an answer. Educating yourself will empower you to make informed decisions about what your choices actually are.
Short Sale Waiting Period Waived
I can speak from experience, and assure you that you can indeed disregard the waiting period for a short sale, or deed in lieu of foreclosure if the mortgage debt was included, and discharged through bankruptcy.
Because many investors are not aware of this interpretation of the guideline, or choose to not work with homebuyers with a hardship in the past, there is a lot of misinformation out there that might be confusing and discouraging for buyers that actually could buy again.
The exception to this is if the default, and loss of the home through foreclosure, short sale, or deed in lieu took place before filing for bankruptcy.
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The challenge is that when loan officers do not want to work with folks that have had credit hardships, they do not bother to stay on top of the guideline changes created to help home buyers recover quicker, and purchase their next home.