Conventional Guidelines On Mortgage Part Of Bankruptcy

This BLOG On Conventional Guidelines On Mortgage Part Of Bankruptcy Was UPDATED On January 3rd, 2018

Conventional Guidelines On Mortgage Part Of Bankruptcy is very different than those of government loans. Borrowers who have a prior Chapter 7 Bankruptcy, there is a four year waiting period to qualify for conforming loans after discharged date of Chapter 7. For government loans, the waiting period reduces to a two year waiting period to qualify after Chapter 7 discharged date. Conventional Loans are called conforming loans because it needs to conform to Fannie Mae and Freddie Mac Guidelines.

  • Under Conventional Guidelines On Mortgage Part Of Bankruptcy, the waiting period after bankruptcy starts from the discharge date of Chapter 7 bankruptcy discharged date
  • Just because one has passed the waiting period after bankruptcy does not automatically qualify them for either government and/or conventional loans
  • Need to get an approve/eligible per Automated Underwriting System Approval
  • Mortgage lenders like to see that the mortgage borrowers has had no late payments after the bankruptcy and/or foreclosure
  • AUS will also review if the borrower has re-established since the bankruptcy and/or foreclosure
  • For those folks who have recently filed bankruptcy should start re-establishing their credit as soon as possible
  • A bankruptcy can drop credit scores by more than 150 FICO points, however, this is a temporary set back and credit scores will increase as the bankruptcy and/or foreclosure ages
  • The negative effects of bankruptcy will eventually not affect credit scores as it ages
  • As Chapter 7 bankruptcy ages, credit scores will naturally go back up even without re-established credit
  • However, by re-establishing your credit, scores will go up much faster

Re-Establishing Credit After Bankruptcy And Foreclosure

I have seen mortgage loan borrowers have credit scores of higher than 700 FICO after two years of filing bankruptcy.

  • The best and fastest way of re-establishing credit after bankruptcy and foreclosure is by getting secured credit cards
  • I strongly recommend get three to five secured credit cards with $500 credit limits
  • Credit Limits under $500 will have less of an impact on optimizing credit scores
  • Anyone can get a secured credit card but make sure to check with the secured credit card company and to confirm that the secured credit card company reports it to all three credit reporting agencies: 
    • Transunion
    • Equifax
    • Experian

Some secured credit card companies only report to one or two credit bureaus and not all three. Make sure when getting secured credit cards to rebuild credit that they report them to all three credit bureaus.

Secured Credit Cards In Re-Establishing Credit

The reason of getting secured credit cards is not for the convenience of having credit cards.

  • Purpose is to use it as a tool to improve credit scores
  • Each secured credit card should instantly boost credit scores by at least 20 points or more
  • As secured credit card ages, scores will also improve
  • Never be late on secured card monthly payments
  • Secured credit card late payments will be reported on the credit bureaus and will negatively impact credit scores
  • Mortgage applicants cannot be late on secured credit card payments: 
    • This will defeat the purpose of getting secured credit cards
    • Making late payments on the minimum secured cards will be more of a negative than not getting them

Conventional Loan After Foreclosure

To qualify for a conventional mortgage loan after regular foreclosure the waiting period is 7 years.

  • This waiting period of 7 years after recorded date of foreclosure is different if the borrower had a deed in lieu of foreclosure and/or short sale
  • Fannie Mae and Freddie Mac has different waiting period requirements on foreclosure versus short sale and deed in lieu of foreclosure
  • There is a four year waiting period after the recorded date of deed in lieu of foreclosure and/or short sale to qualify for conforming loans
  • For those who have Chapter bankruptcy, FHA loans are the best route to take
  • Government Loans (FHA, VA, USDA) has a two year waiting period after Chapter 7 Bankruptcy discharged date for home buyers to qualify for their loan programs

Foreclosure

A foreclosure is when a homeowner defaults on their mortgage loan and the bank takes possession of the property.

  • Thousands of homeowners faced foreclosures due to the economic collapse of 2008
  • However, there is life after foreclosure
  • Home buyers can qualify to purchase a home after a foreclosure
  • There is a mandatory waiting period of 3 years from the recorded date of a foreclosure, deed in lieu of foreclosure, short sale to qualify for FHA and USDA Loans
  • The U.S. Department of Veteran Affairs shortens those waiting period to two years
  • The recorded date is so important
  • Just because homeowners turn the keys in to their mortgage lender does not mean that the deed of home was transferred out of homeowners name
  • The deed that has been transferred out of homeowners name and into the mortgage lenders name needs to be recorded with the county recorder’s of deeds office
  • This recording date is what mortgage lenders will go by as of the starting date of waiting period after foreclosure
  • Many mortgage lenders are in no hurry of transferring name into their name on the deed of the foreclosed property
  • Homeowners who are current going through a foreclosure or have recently had a foreclosure, make sure that the deed of the property is out of their name and into the mortgage lender’s name
  • If foreclosure went to a sheriff’s sale, the waiting period starts from the date of the sheriff’s sale

2018 Conventional Guidelines On Mortgage Part Of Bankruptcy

I get asked many times on having a foreclosure part of bankruptcy.

  • Many folks who filed bankruptcy have the foreclosure part of bankruptcy
  • For those who have foreclosure part of bankruptcy, they need to make sure that after the discharge of the bankruptcy that the deed is transferred out of their name into the mortgage lender’s name
  • A foreclosure part of bankruptcy will wipe out the mortgage loan but the deed is still in the foreclosed homeowner’s name
  • In a nutshell, the homeowner now owes nothing on their mortgage balance but owns the deed to the house

Conventional Guidelines On Mortgage Part Of Bankruptcy Waiting Period

Homeowners with mortgage part of bankruptcy, the waiting period after the bankruptcy under Conventional Guidelines On Mortgage Part Of Bankruptcy, the waiting period is four years from the discharged date of the Chapter 7 Bankruptcy discharged date:

  • The mortgage part of bankruptcy on government loans is different than it is with Conventional Loans under iConventional Guidelines On Mortgage Part Of Bankruptcy
  • With government loans, the waiting period starts when the housing event has been finalized after the Chapter 7 Bankruptcy discharged date
  • The waiting period is three years from the recorded date of the foreclosure on FHA and USDA Loans after the discharged date 
  • Waiting period gets reduced to two years from the recorded date of foreclosure, deed in lieu of foreclosure or short sale date on VA Loans
  • Many folks believe just because they have a mortgage part of bankruptcy that the waiting period starts the date of the bankruptcy discharge date
  • This is absolutely not the case on government loans but it is true on conventional loans
  • Unfortunately, there are bankruptcy attorneys that did not advise their clients concerning this important matter
  • There are still thousands of folks who had mortgage part of bankruptcy where the deed is still in their name and not in the mortgage lender’s name
  • A recent home buyer called me a few weeks ago and told me that it has been three years since they filed bankruptcy
  • They had mortgage part of their Chapter 7 bankruptcy
  • They finally waited out the mandatory waiting period, or so they thought
  • Unfortunately, the mortgage part of bankruptcy was not transferred out of their names and it is still in their names
  • These poor folks thought that having their mortgage part of bankruptcy was the end of foreclosure and bad debt stage of their life but that is not the case
  • Now they need to wait three years from the date when the mortgage lender transfers the deed out of their name into their name to qualify for FHA Loan
  • They can qualify for conventional loans under Conventional Guidelines On Mortgage Part Of Bankruptcy once their foreclosure has been finalized

Alternative Finance Loan Programs With No Waiting Period After Housing Event

HUD launched a new FHA mortgage loan program that shortens the waiting period to one year for folks who have a bankruptcy and/or foreclosure back in August 2013. We will discuss the FHA Back To Work Loan Program briefly. This loan program no longer exists and has been discontinued since 2014. However, The Gustan Cho Team at USA Mortgage offers non-qm loans which is a portfolio loan program with no waiting period after a housing event and a one year waiting period after Chapter 7 Bankruptcy discharged date.

  • It was called the FHA Back to Work due to an economic event mortgage program
  • To qualify for this program which shortens the waiting period to one year after a foreclosure and/or bankruptcy
  • In order to qualify for the Back to Work mortgage program, the borrower needed to have been unemployed or underemployed for six months prior to the initiation of the bankruptcy and/or foreclosure
  • The reason for the bankruptcy and/or foreclosure needed to have resulted a 20% reduction of their household income
  • Due to this economic event, the result was for them to file bankruptcy and/or initiate foreclosure proceedings
  • The Back to Work mortgage loan program applicant needs to have had good credit prior to the economic event and have re-established credit after the bankruptcy and/or foreclosure
  • The Back to Work Extenuating Circumstances mortgage loan borrower needs to have no late payments after the bankruptcy and/or foreclosure and no overdrafts in bank statements in the past 12 months
  • Rental verification is a must and will carry a lot of weight
  • All FHA Back to Work Extenuating Circumstances mortgage loans were all manual underwriting mortgage loans
  • With manual underwrites, the front end debt to ratio caps are normally 31% and the back end debt to income ratios are at 43%
  • However, these front end and back end debt to income ratios can be exceeded at underwriters discretion if the mortgage loan borrower has compensating factors

The FHA Back To Work Mortgage Loan Program has been discontinued since 2014. This loan program turned out to be a major flop. Tens of thousands of mortgage applicants applied but only a fraction of those ended closing on their loans.

2018 Update On Conventional Guidelines On Mortgage Part Of Bankruptcy

There are new rules and regulations on Conventional Guidelines On Mortgage Part Of Bankruptcy.

  • Home Buyers who had a mortgage part of bankruptcy can qualify for a conventional loan four years from the discharged date of Chapter 7 Bankruptcy even tough foreclosure has not been transferred at a later date. Under Conventional Guidelines On Mortgage Part Of Bankruptcy, the mortgage cannot have been re-affirmed and the housing event needs to have been finalized. 

To learn more about Conventional Guidelines On Mortgage Part Of Bankruptcy or to qualify for mortgage with direct lender with no lender overlays on government and conventional loans, please contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

By Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

Leave a Reply

Your email address will not be published. Required fields are marked *