Know anyone that had a bankruptcy or foreclosure during the past decade? Unfortunately, not many of us can say “no” to that question. Here is a better question – know anyone who had both a bk and a foreclosure?
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Bankruptcy + Foreclosure Mortgage Approval
Over the past 10 years many suffering through a bankruptcy or a foreclosure actually endured both a bankruptcy AND a foreclosure. Commonly, bankruptcy attorneys advise their clients to include a defaulting mortgage in their bankruptcy. Although including a mortgage in a bankruptcy is legally beneficial, how does it impact someone applying for a home loan?
As a result of a common sense change from Fannie Mae, consumers with a mortgage rolled into their bankruptcy have a faster path back to home-ownership. In fact, they often qualify for a new home loan much sooner than the standard 7 year long post foreclosure wait period.
Mortgage & Bankruptcy – Shorter Wait to Re-Qualify
Waiting nearly a decade for your “post-foreclosure mortgage eligibility” seems evil and punitive. After-all, 7 years is 10% of an American’s home-buying life! The standard post-foreclosure wait is 7 years. The standard post chapter 7 bankruptcy wait is 4 years. However, as you probably guessed, Conventional home loan rules did not err in your favor, until now.
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Fannie Mae shortened the waiting period from 7 year to 4 years for certain foreclosure scenarios. Now, borrower’s with a mortgage that was discharged in their bankruptcy are eligible for a new Conventional home loan in just 4 years. 4 years from what you ask? Keep reading.
4 Year Wait for Mortgage Discharged in Bankruptcy
When the above is true, Fannie Mae allows lenders to anchor a consumer’s post foreclosure wait off their bankruptcy discharge date. In addition, meeting the above criteria shortens the wait period to 4 years. The mortgage must foreclose AFTER the bankruptcy filing date. Technically, Fannie’s rule says “mortgage must be fully discharged in the bankruptcy.” As a result, to be eligible for this shorter wait, re-affirmation of the mortgage in question is not eligible.
In conclusion, the lending industry got this right. More specifically, Fannie Mae got it right. Financial insolvency occurs for a consumer when mortgage payments start getting missed on their mortgage. Not after, multi year bank related foreclosure delays. Why penalized them years beyond reason? Post derogatory wait periods are both a punishment and a deterrent. Fair, when within reason. Felons get credit for time served? Why not give home-buyers the same courtesy.
By Jeremy House