Wednesday, October 13, 2010

Bankruptcy, Foreclosure, and Short Sale Timelines

Here are the current waiting periods before someone who has had a bankruptcy, foreclosure, or a short sale can qualify for a mortgage:

Chapter 7 Bankruptcies:

Conventional (non-government) loans:
-- 4 years from the discharge date
FHA loans:
-- 2 years from the discharge date
VA loans:
-- 2 years from the discharge date

Chapter 13 Bankruptcies:

Conventional loans:
-- 2 years from the discharge date or 4 years from the dismissal date
FHA loans:
-- 1 year of the payout period must elapse
VA loans:
-- 1 year of the payout period must elapse

Foreclosures:

Conventional loans:
-- 5 years from the completion date with 10% down and a 680 credit score
-- 7 years from the completion date with 3% or 5% down
FHA loans:
-- 3 years from the completion date
VA loans:
-- 2 years from the completion date

Short Sales:

Conventional loans:
-- 2 years with 20% down
-- 4 years with 10% down
-- 7 years with 3% or 5% down
FHA loans:
-- No waiting period if all mortgage payments and all other installment debt payments were made on time for the 12 months prior to the short sale
-- The short sale payoff must serve as payment in full. No outstanding deficiency can exist after the short sale.
-- The new purchase cannot be for a property of equal or greater value than the property sold in the short sale if the new property is within a "reasonable commuting distance" of the short sale property.
-- If the borrower is in default on their mortgage at the time of the short sale, the waiting period is 3 years.
VA loans:
-- VA does not have a specific policy regarding short sales.

In addition, each lender is allowed to impose their own, more restrictive guidelines on top of these guidelines. Always check with the individual lenders to find out what their guidelines are. Some lenders follow the guidelines above, and some have much stricter guidelines.

What impact does this have on the real estate industry?

These guidelines (and all guidelines) are not put in place to prevent people from owning houses. Rather, they are intended to keep people in houses.

The short-term effect of strict underwriting guidelines is never good for the industry because fewer people will be able to qualify for a mortgage. However, the long-term effect of strict underwriting guidelines is very good for the industry. Fewer properties will go into foreclosure, helping to preserve values. If values are maintained or go up, more people will want to buy a house.

It is important to understand the guidelines so you can advise your clients correctly. For instance, no one should ever tell a client to stop paying their mortgage so they can qualify for a short sale.

The FHA and VA rules for bankruptcies, foreclosures, and short sales are actually quite lenient when compared to conventional underwriting guidelines.

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