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Monday Morning Mortgages>
Monday Morning Mortgages
January 11, 2010
Foreclosure, Short Sale, Bankruptcy, or Deed in Lieu Effect on Credit Qualifying
There has been some controversy in the real estate community on lending after losing one’s home or declaring bankruptcy; two conditions that are very common in Sonoma County now. The confusion is understandable as there are 3 sets of lending guidelines that dictate requirements, and two of the guidelines allow for “extenuating circumstances” which could reduce the minimum wait times for a new mortgage.
Extenuating Circumstances
Initially, “extenuating circumstances” were thought to be common using the excuse that the unforeseen dramatic drop in housing values forced people into difficult financial situations. But lenders are making the criteria for extenuating circumstances more strident now. Any claim of extenuating circumstances would need to be documented and approved by the underwriter.
Definition of Extenuating Circumstances - Fannie Mae B3-5.3-07
Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant and prolonged reduction in income or 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.
FHA clarifies: The lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to recur. And divorce is not considered an extenuating circumstance for FHA.
Here is a matrix of current guidelines. Attached are the specific references from which agency the guidelines are taken; right from the source.
Period Required to Re-establish Credit after Derogatory Events
Fannie Mae FreddieMac FHA
Foreclosure 5 yrs w 2 yrs of restrictions* 3 yrs 3 yrs
w exten. circ. 3 yrs w 4 yrs of restrictions* - -
Short Sale 2 yrs 2 yrs If current w pmts: no wait**
If in default: 3 yrs
w exten. circ - - -
Deed in Lieu 4 yrs w 3 yrs restrictions* 2 yrs 3 yrs
w exten. circ - - -
Bankruptcy Chap 7/11 4 yrs 2 yrs 2 yrs
w exten. circ 2 yrs - 12 months
Bankruptcy Chap 13 2 yrs from discharge
4 yrs from dismissal 2 yrs 1 yr of satisfactory payout period; w court permission
* restrictions being a 680 FICO minimum, 10% down minimum, no cash-out refis.
** A borrower is not eligible for a new FHA-insured mortgage if s/he pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions, and purchased at a reduced price a similar or superior property within a reasonable commuting distance.
Re-establishing Credit After Derogatory Events
Re-establishing credit requires a minimum of four credit references. The total four references can include rental history and insurance or utilities but must include one housing related and one traditional credit source. No more than 2 debt payments 30 days past due in the last 24 months and no 60 day lates. No housing payment past dues would be accepted and no new public records like further derogatory events, judgments, collections or garnishment.
Rates and the Economy (courtesy of Rob Chrisman, RPM)
In December the US lost 85,000 jobs, but November showed a gain for the first time in two years. Still, the markets believe that the Fed will keep overnight rates close to 0% for quite some time – we’re not out of the woods yet. November Pending Home Sales fell 16% from October, but the decline followed nine straight months of increases and November Pending Home Sales were 15% higher than one year ago.
Private payrolls are still contracting, the Fed has not changed its stance too much in several months, manufacturing is picking up a little as opposed to construction spending which is not, and auto sales are picking up a little, as is service sector activity. Most believe that rates will move up, but not much, in the first part of 2010 – maybe with the 10-yr going above 4.00%. This will push the dollar higher somewhat, but will also bring investors in to the fixed income market, helping mortgage rates.
This week the economic calendar is pretty light until later in the week, and currently the 10-yr is at 3.82% and mortgage prices are about unchanged.
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