Conventional Loan Waiting Period After A Deed In Lieu And Short Sale

This BLOG On Conventional Loan Waiting Period After Deed In Lieu And Short Sale Was UPDATED On August 20, 2017

Government loans are the home loans that are guaranteed by a government agency. Government insured mortgage loans are for owner occupant properties.

Here are the types of government loans:

  • FHA Loans
  • VA Loans
  • USDA Loans

Conventional Loans are not insured by any government agency.

  • Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set the conventional loan guidelines.
  • Conventional Loans are often called conforming loans because they need to conform to Fannie Mae and Freddie Mac guidelines.
  • Conventional Loans need to conform to Fannie Mae and/or Freddie Mac Guidelines in order for lenders to be able to re-sell the conventional loan they fund to Fannie/Freddie.
  • If it does not conform to Fannie/Freddie guidelines, lenders cannot re-sell the loan after it funds.
  • No lender wants to keep the loan in their books.

Both government and conventional loans have mandatory waiting period after bankruptcy and foreclosure.

Waiting Period After Foreclosure To Qualify For Conventional Loans

  Conventional loans have higher underwriting criteria than FHA loans.

  • Home buyers can qualify for conventional loans after foreclosure.
  • Minimum waiting period to qualify for a conventional loan is 7 years from the date the recorded date foreclosure.
  • The waiting period start clock starts on the date the deed is transferred out of name of the homeowner or the date of the sheriff sale.

What Is Conventional Loan Waiting Period After Deed In Lieu And Short Sale

Unlike government loans, conventional loans have different waiting period requirements on deed in lieu and short sale versus foreclosure.

Mortgage Loan Applicants who had a deed in lieu of foreclosure and/or short sale, the waiting period is as follows:

  • 4 year waiting period after short sale
  • Waiting period start clock starts from the date of short sale reflected on the HUD Settlement Statement
  • 4 year waiting period after the recorded date of the deed in lieu of foreclosure and/or date of sheriff’s sale
  • 7 year waiting period after the recorded date of foreclosure and/or date of the sheriffs sale

Waiting Period If Borrower Had Mortgage Part Of Chapter 7 Bankruptcy On Government Loans

There are times where a mortgage loan applicant had mortgage part of Chapter 7 Bankruptcy in the past.

  • Government and Conventional Loans have different rules when it comes to qualifying for mortgage with a prior mortgage as part of their Chapter 7 Bankruptcy.
  • With FHA, VA, USDA Loans, borrowers who a mortgage or mortgages as part of their Chapter 7 Bankruptcy, the waiting period clock starts the date the foreclosure, sheriffs sale, and/or short sale was finalized after the Chapter 7 discharged date.
  • For FHA and USDA Loans, the waiting period is three years from the recorded date and/or sheriff’s sale date of the  foreclosure.
  • VA has a two year waiting period after Chapter 7 Bankruptcy, foreclosure, deed in lieu of foreclosure, short sale to qualify for a mortgage.

When someone files Chapter 7 Bankruptcy with a mortgage part of their Chapter 7 Bankruptcy, the mortgage balance get discharged and borrower no longer owes the debt of their home loan.

  • However, the property is still in the lender’s name.
  • The deed to the property needs to be out of the homeowners name and into the lenders name or other party’s name.
  • That date when the deed is transferred out of the name of the homeowner and recorded is the official start date of the waiting period.

Qualifying For Conventional Loans With Mortgage Part Of Chapter 7 Bankruptcy

There are instances where borrowers can qualify for conventional loans but not FHA Loans or other government loans.

  • Conventional Loans have different waiting period start clock when it comes to mortgage part of Chapter 7 Bankruptcy.
  • People who had a mortgage or multiple mortgages as part of their Chapter 7 Bankruptcy can qualify for conventional loans four years from the discharged date of their Chapter 7.
  • The foreclosure and/or sheriffs sale can be recorded at a later date.
  • The mortgage cannot be re-affirmed.

Automated Approval: Automated Underwriting System

The first round in getting a conventional loan after the 4 year waiting period with 5% down after a deed in lieu of foreclosure and/or short sale is getting an automated approval from Fannie Mae’s Automated Underwriting System.

  • Just because borrowers have 5% down payment and have waited the 4 year waiting period does not automatically qualify them.
  • Getting an AUS approval is the first step.

Deed In Lieu Of Foreclosure Versus Foreclosure

Many times a mortgage loan borrower will get a AUS denial because the deed in lieu of foreclosure and/or short sale was reported as a regular foreclosure and not as a deed in lieu and/or short sale.

  • If this is the case, it is not the end of the world. 
  • It will take a little time to have the deed in lieu and/or short sale corrected on credit report by submitting the corrected paperwork to a third party credit vendor and doing a rapid rescore. 
  • Loan officer and lender will take care of this for borrowers. 
  • It normally takes a 3 to 5 business days to do a rapid rescore. 
  • Once errors is corrected and updated on credit report, the new credit report will then be re-submitted to AUS for an automated approval.

Qualifying For Conventional Loans But Not FHA Loans

There are instances where borrowers can qualify for Conventional Loans but not FHA Loans, VA Loans, or USDA Loans.

  • This is the case when borrowers had a prior mortgage part of their bankruptcy.
  • With conventional loans, if a homeowner had a mortgage or mortgages (more than one mortgage) as part of their Chapter 7 Bankruptcy, there is a four year waiting period from the discharged date of their Chapter 7.
  • The foreclosure can be recorded at a later date and that is immaterial.
  • The mortgage cannot be re-affirmed and the foreclosure needs to have been finalized in order to qualify for conventional loan.

AUS Analysis

The Automated Underwriting System will not just take into account the 4 year waiting period, credit payment history on credit report, and  down payment.  The AUS will evaluate full credit report and credit scores.

  • It will take into account income, debts, liabilities, and assets. 
  • It will analyze your debt to income ratio, analyze credit tradelines.
  • It will review if borrower had any late payments after deed in lieu/short sale, credit inquiries, job history, payment history, payment and credit patterns, and overall financial and credit profile including reserves and cash to close.

Mortgage Overlays On Conventional Loans After Foreclosure & Short Sale

Again, just because a potential home buyer has waited the 4 year waiting period and has the 5% down payment after deed in lieu/short sale does not guarantee a conventional loan approval.

  • The file needs an Automated Underwriting System approval.
  •  AUS automated approval does not guarantee that borrower will qualify for a conventional loan with every lender.
  • Many lenders have lender overlays on conventional loans.
  • With an AUS automated approval, the chances that the borrower will get mortgage loan approval and will close on new home purchase is promising with lenders with no lender overlays.
  • Many mortgage lenders do have overlays on top of Fannie Mae and Freddie Mac mortgage guidelines. 
  • Many banks or mortgage lenders have overlays on government and conventional loans.
  • The Gustan Cho Team at USA Mortgage is a direct lender with no lender overlays on government and conventional loans.

Types Of Mortgage Lenders

Mortgage bankers normally only deal with their own products and do not have any correspondent relationships with other lenders.

  • There are mortgage bankers that do have correspondent relationships and may try them. 
  • Mortgage loan applicants can also contact several credit unions who are direct resellers of Fannie Mae loans. 
  • There are mortgage brokers  who have access to dozens of wholesale lending sources and gets paid a commission (yield spread premium) by direct lenders. 
  • There is possibility of getting denied by some lenders due to their overlays even with an Automated Underwriting Approval.
  • There are many lenders and out of those lenders, there are lenders with no lender overlays. 
  • It is a matter of picking and choosing the right lender. 
  • Even mortgage lenders with overlays can make an exception and look at file and approve your loan. 

Typical Lender Overlays

Many lenders will not want to approve a 5% down payment conventional loan after four year waiting period for the following reasons as part of their overlays:

  • If the homeowner just bailed on the house because they were upside down and did not have extenuating circumstances. 
  • However, most homeowners had their own reason in doing a deed in lieu and/or short sale such as a divorce, job loss, medical reasons, or loss of business.

Some of the lender overlays are the following:

  • Require higher credit scores than the 620 Minimum required on conventional loans.
  • Minimum 3 credit lines for at least 12 months. 
  • Rental verification is counted as a strong credit tradelines if it can be documented via cancelled checks for the past 12 months or a letter from a licensed property management company.
  • No late payments after the deed in lieu of foreclosure/short sale.
  • Debt to income ratio minimums such as 40% or 45% DTI.
  • No debt settlement programs or debt reductions.
  • This overlay is implemented by many lenders. 
  • These lenders view debt settlement and/or debt reduction payment plans the same as a bankruptcy. 
  • It is not in the Fannie Mae guidelines but it is their own silly overlay.

In conclusion

Many hard working American families have fallen victims to this country’s financial and credit meltdown.

  • They have since worked hard and re-established their financial and credit profile and are ready to rebuild their lives.
  • They have saved their hard working dollars to save  up to purchase a home and now qualify after waiting the 4 year waiting period and have the 5% down payment to purchase their dream home.
  • Although many lenders may have silly overlays that do not make sense, there are lenders with no or little overlays like The Gustan Cho Team at USA Mortgage with no lender overlays.
  • We will gladly approve mortgage loan with an automated approval and qualify under Fannie Mae guidelines.
  • These lenders will give a mortgage loan approval and resell it to Fannie Mae and/or Freddie Mac.

Home Buyers who are in a situation where they are ready to purchase a home after waiting the 4 year waiting period after a deed in lieu of foreclosure or short sale and have been turned down by other mortgage lenders due to their lender overlays, please contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email me at gcho@gustancho.com .  Our viewers are welcomed to subscribe to our daily mortgage and real estate newsletter at www.gustancho.com for the latest mortgage and real estate news.

2017 Update On Conventional Loan After Deed In Lieu Of Foreclosure And Short Sale

Unfortunately the 2 year waiting period to qualify for a conventional loan after a deed in lieu of foreclosure and short sale with 20% down payment is no longer available and has been terminated by Fannie Mae on August 2014.

  • The new waiting period to qualify for a conventional loan after a deed in lieu of foreclosure and short sale is 4 years from the recorded date of the deed in lieu of foreclosure or the date of the short sale with re-established credit. 
  • The waiting period after a standard regular foreclosure to qualify for a conventional loan is 7 years from the recorded date of the foreclosure.

Related> Conventional Loan After Deed In Lieu And Short Sale

Related> Waiting Period After Deed In Lieu And Short Sale

Related> Qualifying For A Conventional Loan After Deed In Lieu And Short Sale

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.

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