Fannie Mae updated its policies regarding significant derogatory credit events, which in some cases allows more borrowers to reenter the housing market. These updates are reflected in the embedded chart: How long after bankruptcy or foreclosure must you wait to get a mortgage?
- Waiting Period for Mortgage Debt Discharged Through Bankruptcy
The borrower is now held to the bankruptcy waiting period (4 years) and not the foreclosure waiting period (7 years). This is true even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt. This is a significant and favorable change. From the FNMA underwriting guidelines (B3-3-07): “When both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on the credit report, the lender may apply the bankruptcy waiting period if the lender obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting period must be applied.”
[At this time FHA/VA/USDA require a two year waiting period following discharge and a three year period post-foreclosure.]
- Short Sale or Deed-in-Lieu Waiting Period
The waiting periods are being updated to establish a standard four year waiting period, with a two year waiting period permitted providing a borrower has extenuating circumstances*.
[FHA/VA/USDA require a three year waiting period following Short Sale or Deed-In-Lieu.]
- Mortgage Debt
As a new policy, charge-offs of mortgage accounts now require a four year waiting period following this derogatory credit (two years if the borrower can demonstrate extenuating circumstances*).
Number one became effective July 29, 2014; two and three are effective for mortgage loans with applications dated on and after August 16, 2014.
How do you know if Fannie Mae owns/owned your mortgage? Click on FNMA Loan Lookup.
Based on past experience, it will take time for the mortgage origination industry to catch up with these new policies. Further, it is likely that some will not accept these policies within their own underwriting guidelines.
*Given the reliance on automated underwriting for compliance purposes, few lenders will delve into the perceived risk of manually underwriting extenuating circumstances for fear of losing the QRM safe harbor. QRM standards were implemented on January 10, 2014. The vast majority of lenders are staying squarely inside the New Rules box, so to speak.
Reference: Fannie Mae Selling Guide Announcement SEL-2014-10
Image Credit: Reuters/Jonathan ErnstFinancially Speaking™ James Spray, MLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 |August 10, 2014 | Updated January 28, 2018
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