October 14th, 2008 9:31 AM by Lehel Szucs
Bankruptcy foreclosure conventional changes - short sale clarification - requirements
Along with all the changes resulting from the massive Housing Law,conventional lending (FNMA) has now implemented significant changes to aging requirements for bankruptcy and foreclosure seasoning, as well to the disposition of present homes in the purchase of a new home.Times are getting tighter in the world of mortgage credit.
Bankruptcy dating is based on the discharge or dismissal date.
Chapter 7 and Chapter 11 bankruptcy, period to reestablish credit is 4 years.
Chapter 13 dismissed bankruptcy, period to reestablish credit is 4 years from dismissal date.
Chapter 13 discharged bankruptcy, period to reestablish credit is 2 years from discharge date.
Previous bankruptcy policy applies to persons who have a prior bankruptcy in the last 7 years. A person with multiple bankruptcies requires a 5 year period to reestablish credit. There had been no provision for multiple bankruptcies before this policy change.
There is a provision to reduce the 4 year period to 2 years in the case of extenuating circumstances.
This transaction "involves the sale of the property by the borrower to a third party for less than the amount owed to satisffy the delinquent mortgage, as agreed to by the lender, invesot, and mortgage insurer."
Such short sales will require a 2 year period to reestablish credit after a short sale is completed.
The time for reestablished credit is increased from 4 years to 5 years, with additional requirements for the period between 5 and 7 years. During this period a 10% down payment will be required and a minimum score requirement is 680. No investment propery allowed. No second home allowed. No cashout refinances allowed. After 7 years normal guidelines will apply.There is a provision for a 3 year period after a foreclosure in the case of extenuating circumstances.
Deed in lieu of foreclosure is similar to foreclosure, except the reestablish credit period is 4 years. The same additional requirements exist between 4 and 7 years as apply above between 5 and 7 years after a foreclosure.Existing Home Disposition when purchasing a new home.
The new policy make significant changes to the disposition of the previous residence when a new home is purchased.
Conversion to Second Home - borrower debt ratio must qualify with both payments and must have 6 months reserves for both house payments. If there is 30% equity in the existing property the reserve requirement can be reduced to 2 months for both properties.
Conversion to Investment- To count rental income the borrower must have 30% equity in the existing property, as determined by a new appraisal, AVM, or BPO. If there is not 30% equity, the borrower debt ratio must qualify with both payment and the borrower must have 6 months reserves for both properties.
These requirements are for manually approved loans. For automated approvals, these rules are applied manually. For automated approvals, the actual reserve requirements will be determined by the findings. They could be more or less than the manual standards.
Here is a link to the actual Fannie Mae letter.
Credit is key to the ability to purchase a home. Credit management, legitimate credit restoration, credit knowledge are becoming more and more important skills for consumers and for mortgage originators.
I am afraid that credit repair could become a problem as some companies profess to be able to remove bankruptcy and foreclosure and other public records. If credit restoration is abused in this way, then the temptation not to disclose bankruptcy and foreclosure will be great for originators and consumers. It may become the next fraud issue.