There are five categories of credit disruption that require waiting periods before a borrower is eligible for mortgage financing, regardless of income or credit scores. These are: foreclosure, a deed in lieu of foreclosure, a short sale, chapter 7 bankruptcy, and Chapter 13 bankruptcy. In this three-part series, Mark Wells of Preferred Financial Services summarizes the guidelines for obtaining mortgage financing following each type of disruption.
A foreclosure event triggers the longest waiting period of any of the five categories. Any borrower who had a mortgage with a 120-day late payment is considered to have experienced a foreclosure, even if the lender never formally initiated a foreclosure action.
Here are the required waiting periods following a foreclosure for each loan type:
For conventional loans: Four years from the deed transfer of the property involved in the foreclosure for borrowers who are making a 20 percent or greater down payment; seven years from the deed transfer if the borrower is putting less than 20 percent down. However, about two years ago, Freddie Mac removed their stated waiting period, and instead defaulted to an approval at any time their automated underwriting system approves the loan. After running loan scenarios through their LP system for two years, it has been our experience that Freddie Mac still requires a four-year waiting period, as we have not seen a single approval for a borrower whose foreclosure was less than four years ago.
For FHA loans: Three years from the deed transfer of the property for a standard FHA loan with 3.5 percent down payment. About a year ago, FHA introduced its Back to Work program, which allows for eligibility in as little as 12 months if the circumstances surrounding the foreclosure were beyond the borrower’s control and resulted in a 25 percent reduction in household income prior to the foreclosure. The Back to Work program requires third-party verification of the circumstances (major illness or accident, termination of job that was not the fault of the borrower, etc.).
For USDA loans: Three years from the deed transfer of the property, no exceptions allowed.
For VA loans: Two years from the deed transfer of the property, as long as the veteran’s credit scores result in an automated underwriting approval. If the automated system refers the veteran’s loan to manual underwriting, the waiting period is three years.
For jumbo loans: A minimum four-year waiting period, and the borrower’s credit scores must have recovered above a 720 threshold.
Next week: resetting after a short sale. Mark welcomes any questions or comments, and is happy to review your situation to determine when your mortgage eligibility will return and how to best position yourself to qualify when it does. He can be reached at 864-235-9596 or via email at Mark@TheGreatestRates.com.
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