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Bankruptcy, Forelcosures, Shortsales, Collections and Judgments

Nobody wants to lose a home to foreclosure or have to file for bankruptcy. But it happens. So here is a quick reference guide to qualifying for a home mortgage after a derogatory credit event such as a bankruptcy or foreclosure:

Conventional Loans

 

Derogatory Event Waiting Period RequirementsWaiting Period with Extenuating Circumstances
Bankruptcy – Chapter 7 or 114 years2 years
Bankruptcy — Chapter 132 years from discharge date. 4 years from dismissal date2 years from discharge date.

2 years from dismissal date

Multiple Bankruptcy Filings5 years if more than one filing within the past 7 years3 years from the most recent discharge or dismissal date
Foreclosure7 years3 years. Additional requirements after 3 years and up to 7 years:• 90% maximum LTV ratios

• Purchase, principal residence

• Limited cash-out refinance, all occupancy types

Deed-in-Lieu of Foreclosure and Preforeclosure Sale (short sale)4 years2 years

FHA Insured Loans

Chapter 7 Bankruptcy:

  • Two (2) years since discharge and good credit has been reestablished.
  • Bankruptcies less than two (2) years (but not less than 1 year) may be allowed provided the reason for the bankruptcy was due to extenuating circumstances.
  • A borrower whose bankruptcy has been discharged less than one (1) year is not eligible except for non-credit qualifying Streamline Refinances when the loan has been reaffirmed in the bankruptcy.

Chapter 13 Bankruptcy:

Borrower is eligible for an FHA loan one (1) year from when the payout period began period provided all payments to the bankruptcy trustee have been made in a satisfactory manner and the borrower receives court approval to enter into the new mortgage transaction.

Consumer Credit Counseling:

Participation in a consumer credit counseling payment program does not disqualify a borrower from obtaining an FHA-insured mortgage provided that one (1) year of the pay-out period has elapsed under the plan and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive written permission from the counseling agency to enter into the mortgage transaction.

Foreclosure:

A borrower is generally not eligible for a new FHA-insured mortgage for three (3) years after a foreclosure or deed-in-lieu of foreclosure.

An exception to the three-year rule may be granted if the foreclosure was the result of documented extenuating circumstances beyond the control of the borrower, such as a serious illness or death of a wage earner, and good credit has been reestablished since the foreclosure.

Divorce is not considered an extenuating circumstance, however an exception may be granted in cases where the borrower’s loan was current at the time of their divorce, the ex-spouse received the property and the loan was later foreclosed on.

The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

Short Sale:

Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.

Borrowers are considered eligible for a new FHA-insured mortgage if they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and the proceeds from the short sale served as payment in full.

Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are generally not eligible for a new FHA-insured mortgage for three (3) years from the date of the pre-foreclosure sale.

VA Guaranteed Loans

Chapter 7 Bankruptcy:

If the borrower or the borrower’s spouse has had a Chapter 7 bankruptcy, they are not eligible for a VA loan for two (2) years from the date of discharge, not the date of filing.

Chapter 13 Bankruptcy:

Borrower is eligible for an VA loan one (1) year from when the payout period began provided all payments to the bankruptcy trustee have been made in a satisfactory manner and the borrower receives court approval to enter into the new mortgage transaction.

Short Sale:

A borrower is usually eligible immediately after a short sale to purchase a new home with a VA loan if they were current on their mortgage payment and all installment debt payments for the 12 months prior to the short sale, and the short sale wasn’t used to take advantage of market conditions by purchasing an equal or better home within commuting distance.

If the borrower had any late payments on their mortgage in the 12 months prior to the short sale they must wait two (2) years before they will be eligible for a VA loan to purchase a new home. In some instances, extenuating circumstances that led to the short sale will be considered and the borrower may be eligible to buy a home sooner with a VA loan.

The short sale must have served as payment in full on the existing lien(s) at the time of the short sale.

Borrowers with a previous bankruptcy or foreclosure reporting on their credit in addition to a short sale will usually not be eligible for a VA loan.

Foreclosure:

A borrower may not be eligible for a VA guaranteed loan for two (2) years after foreclosure or deed-in-lieu of foreclosure. If the foreclosure was on a VA guaranteed mortgage the borrower may not be eligible for full entitlement for a new loan.

Collections and Judgments:

If a collection is minor in nature it usually does not need to be paid off, however judgments must be paid in full prior to closing. A borrower is not eligible for a VA loan if they are delinquent on any federal debt such as tax liens, student loans, etc. If payment arrangements are made that would bring the borrower up to date they may be considered for VA loan approval.

Consumer Credit Counseling:

Participation in a consumer credit counseling payment program does not disqualify a borrower from obtaining a VA guaranteed mortgage provided that one (1) year of the pay-out period has elapsed under the plan and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive written permission from the counseling agency to enter into the mortgage transaction.