Extenuating Circumstances on Home Loan

One of the MOST common conversations I find myself in today is about whether or not the circumstances that led to a prospective home buyer’s bankruptcy, foreclosure or short sale will be deemed “extraordinary” or “extenuating.”  Why?  Extraordinary or extenuating circumstances can help a prospective home buyer qualify for a new mortgage prior to the standard post short sale, bankruptcy or foreclosure waiting periods outlined in mortgage guidelines.  For example, the standard waiting period for a borrower to be qualified for a new Arizona FHA mortgage after a short sale when they were 30 days + late on their mortgage payments prior to short sale completion is 3 years.  If the borrower can document that an extraordinary circumstance led to their short sale they may be able to obtain FHA financing prior to the 3 year mark.

The million dollar question is what will a mortgage underwriter consider extraordinary/extenuating?  There is no simple answer to this question as circumstances are evaluated on a case by case basis AND they are viewed differently with various loan types.  FHA, VA and Conventional loans all have their own unique guidelines that impact what an underwriter will approve.

FHA And Extraordinary Circumstances

FHA guidelines are relatively cut and dry in this area.  For the most part, extenuating circumstances are limited to the following:

1. Death of a primary wage earner in the household
2. Serious illness for a primary wage earner in the household resulting in a loss/reduction in income

FHA will NOT consider a divorce as an extenuating circumstance.   Typically, job loss will also not be considered as an extenuating circumstance however there are certain cases where an underwriter will accept job loss as extenuating.

For those of you scratching your head wondering why is job loss not a standard extenuating circumstance an FHA home loan, know that I am scratching my head with you.  Death of a primary wager earner means a loss of income which may cause a short sale, foreclosure and bankruptcy.  As soon as someone can let me know how this sentence is any less accurate if I substitute the words “death of a primary wager earner” with the words”job loss” I will be sure to let you know!

VA Home Loan & Extenuating Circumstances

VA is the most lenient type of an Arizona home loan with regard to allowing/approving extenuating circumstances.  For one, VA does not have a time-frame for qualifying after a short sale so the amount of time a VA loan applicant must wait to qualify for a new VA loan is open-ended and related to what their story is.  In addition, VA mortgage guidelines are written so that an underwriter can grant an exception to the standard waiting periods much more easily than most other loan types.

VA regulations do consider job loss as an extenuating circumstance in certain situations.  Check out this story of a Veteran client that we just closed a VA loan for prior to 2 years after a short sale with an extenuating circumstance that was 100% job loss related – click HERE.

VA will also accept income loss due to prolonged strikes, medical bills not covered by insurance along with unemployment/failure of a business for self-employed borrowers as extenuating circumstances in addition to death or serious illness related to the loss of household income.  VA is much more forgiving than FHA in this area. VA however will also not consider divorce an extenuating circumstance.

VA standard guidelines require a 2 year waiting period for post foreclosure or post bankruptcy borrowers however, when a Phoenix area loan officer can help a veteran document extenuating circumstances that 2 year time-frame may be cut to 1 year.  Rarely will a borrower be able to qualify for a VA home loan less than 1 year after a bankruptcy or foreclosure.

Conventional Home Loan & Extenuating Circumstances

When a borrower is applying for a Conventional loan, there is no way to manually approve a file that is not approved by Fannie Mae‘s or Freddie Mac‘s automated underwriting systems.  This reduces the opportunity for an underwriter to overturn any steadfast guidelines.  However, Fannie Mae does have a tiered guideline set up.  Fannie Mae allows borrowers that receive an approval though their automated underwriting system and that can prove an extenuating circumstance to qualify at the short end of Conventional guidelines/waiting periods.  If, on the other hand the borrower short sold, foreclosed or filed bankruptcy due to financial mismanagement they will be required to wait out the time-frames on the long side of Conventional/Fannie Mae guidelines even when they receive an automated approval.

If you have any questions about your extenuating circumstance and how it impacts your ability to finance your next home please call or email!

By Jeremy House
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