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.
This update, effective immediately affects the waiting period for any foreclosure, short sale or deed in lieu of foreclosure that occurred after the mortgage debt was discharged through 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.
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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.
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Hi my bankruptcy was discharged in 8/2010 the house was retained. They did not foreclose until 6/17. The lender denied me the loan because it was not surrendered instead it was retained. If you retain a home included in a bankruptcy is it still a 7 year waiting period for a conventional loan ? They are telling me if I surrendered the home it would be 4 years but since the retained bix was checked off I have to wait 7 years or I have to go FHA and that has a high PMI. I’m only putting down. 5%
Hi Bessie, no Fannie Mae guidelines differentiate between surrendering the home and retaining the home. In 2015, Fannie Mae published a guideline that states that you can ignore the foreclosure if it happens on a mortgage that was discharged through bankruptcy. You should be eligible for either Conventional or FHA financing with the foreclosure occurring in 2017.
Feel free to find a mortgage expert on the network by searching by State at the bottom of the site, or you can GO HERE, and we will match you with someone that has experience with these guidelines.
Hope this helps?
I included my home in a bankruptcy that was filed and discharged in 2009. I have been out of house for almost 10 Years, and put purchase offer on home, just to find out that my home was never foreclosed on until 2017, over 8 years after bankruptcy, so do I have to wait even longer to buy home, because it took so long for bank to for close on my home
Hi Laurie, you are eligible to buy TODAY! Fannie Mae actually updated their guidelines in August 2014 that specifically addressed this issue. If a subsequent foreclosure occurs on a mortgage discharged in bankruptcy, you may use the bankruptcy waiting period, which is 4 years.
Shoot me an email to email@example.com and let me know what State you’re buying in. I can introduce you to someone that I know and trust, and has experience with these guidelines.
Hope this helps?
I filed Ch 7 in 2008, included 2 properties with 5 mortgages. After learning of the new conventional guidelines in 2014, we decided to walk away from both properties. The 2nd property finally foreclosed in August of this year. Based on the revised conventional guidelines, it was our expectation we would be able to qualify for FNMA immediately, as we would be able to use the 2008 BK for the start of our waiting period.
In working with a local bank, they are saying because we retained the properties (shown in the Statement of Intention document within the BK filing), this means the debts weren’t discharged and therefore, we cannot use the BK waiting period to determine eligibility. I’ve tried to tell them this does not change whether or not the debts were discharged. We did NOT reaffirm the debts.
Have you heard of ‘retaining a property’ causing an issue like this?
Great question, and you’re technically right. The FNMA guidelines are very vague on this guideline. Here it is in it’s entirety:
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.
You will find that different banks or lenders will have a different tolerance for risk, and more (or less) experience with these guidelines.
If you want to shoot me an email to firstname.lastname@example.org, I can introduce you to a loan officer friend of mine that has experience with these guidelines. As you can tell, we have a lot of experience with this topic! Please include your State.
Hope this helps?
My home was included in my 2010 ch 13 (discharged in 2015). The bank took until 2017 to foreclose on the surrendered home. I finally received a preapproval on a home loan and was denied 10 days before closing (losing about $5k in the new home – earnest $, appraisals, inspections, etc. what can I do?? My bankruptcy lawyer says I can’t be penalized for both the foreclosure and the ch 13 waiting period. I need help?
Hi Amy, I can help. You can use Conventional financing 2 years from the discharge date of the chapter 13.
Send me an email to email@example.com and let me know what State you’re buying in, and the best contact information. I can introduce you to someone with experience with these guidelines.
I think you’ll be fine once we get you connected with someone that can do this.
I hope this helps?