Monday, June 28, 2010

Fannie Mae Adds 2 Years to the Foreclosure Waiting Period

Effective for all loan applications dated October 1, 2010 and later, Fannie Mae is increasing the waiting period before someone can get a mortgage after a foreclosure.

The current waiting period is 5 years, provided the borrower makes a larger than normal down payment, and 7 years if the borrower makes a normal down payment. The 5 year option is being discontinued and the new waiting period will be increasing to 7 years.

If the borrower can document extenuating circumstances, they will be able to buy a house with a Fannie Mae loan after 3 years, but they will need a minimum down payment of 10% and they can only buy a principal residence. They will need to wait the full 7 years to buy a second home or a rental property.

Here is how Fannie Mae defines "extenuating circumstances":

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns covering the periods prior to, during, and after a loss of employment, etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

This new guideline only applies to Fannie Mae loans. FHA and VA loans have shorter waiting periods after a foreclosure.

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