Signing A Real Estate Contract Prior To Waiting Period And AUS Approval Can Be Risky

Waiting Period After Bankruptcy

Qualifying For Home Loan After Bankruptcy And Foreclosure

If a home buyer has had a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, there are mandatory Fannie Mae guidelines they need to abide by prior to applying for a residential mortgage loan and one of the most important guideline is the waiting period.  There is a mandatory 2 year waiting period for a mortgage loan borrower to qualify for a FHA mortgage loan after the discharge date of a bankruptcy.  There is a mandatory waiting period of 3 years from the recorded date of a foreclosure or deed in lieu of a foreclosure in order to qualify for a FHA mortgage loan.  There is a 3 year mandatory waiting period of 3 years from the date of the HUD on a short sale if the borrower has been delinquent on their mortgage payment prior to the date of the short sale.  If the borrower has been timely on their mortgage payments and all other payments for 12 months prior to the date of the short sale, there are no waiting period restrictions.

Rebuilding Credit After Bankruptcy And Foreclosure

Please do not assume that just because you have passed the mandatory waiting period after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale that you are automatically qualified for a residential mortgage loan.  Many home buyers assume that they will automatically qualify for a residential mortgage loan and will have no problem in closing on their home purchase 30 days after they pass the mandatory waiting period and end up having a home under contract.  I have had mortgage loan clients give a home builder a 10% non refundable down payment six or more months prior to their waiting period and really stress out during the mortgage application process.  Luckily, most of my mortgage loan borrowers ultimately closed on their home, however, there are much risks involved in purchasing a home without an automated approval from Fannie Mae’s Automated Underwriting System and clearing it with a wholesale mortgage lender to see if they require any overlays.

Automated Approval Via Fannie Mae’s Automated Underwriting System After Waiting Period

Let’s say that you just passed your waiting period after your bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  Does this automatically qualify you for a mortgage loan and guarantee a mortgage loan approval?  It does qualify you for a residential mortgage loan, however, it does not guarantee you a mortgage loan approval and a set clear to close.  Majority of the mortgage lenders have their own internal overlays and many times can override an Automated Underwriting System approval.

Case Scenario

I recently closed on a conventional mortgage loan.  My client had a deed in lieu of foreclosure two years ago and had entered into a real estate purchase contract six months prior to the 2 year anniversary of their waiting period.  They put a 10% non refundable earnest money deposit with a home builder.  The home was practically done when my client came to me to apply for a loan.  There is a 20% minimum downpayment requirement for a conventional loan after a 2 year waiting period from the recorded date of a deed in lieu of foreclosure.  I ran my client’s mortgage application via our automated system and got an approval.  I then went over their particular case scenario with several of my wholesale mortgage lenders and had the underwriters review the file.  I have presented this mortgage application to 18 wholesale mortgage lenders.  15 of them did not want to touch it even though my borrowers had a 25% back debt to income ratio and great job stability and in the mid six figures in reserves via 401K/Retirements.  Five wholesale lenders wanted to take a look at it and did a soft underwrite.  Four of them took a pass and I got one wholesale lender that took the deal.  The main reason I got this deal approved was due to the fact I had a phenomenal underwriter who thought outside the box and looked at the overall picture.  Some of the reasons why these mortgage underwriters turned this strong file down were the following:

1. Not enough re-established credit.

2. Client had prior debt settlement.  Many mortgage lenders consider debt settlement the same as bankruptcy.  Others consider debt settlement worse than bankruptcy because they can always file bankruptcy in the future.  With bankruptcy, you cannot file another bankruptcy for another 7 years.

3. No rental verification.  Rental verification is one of the most important factors in the mortgage process.  My clients paid their monthly rents in cash.  Always pay your monthly rental payments in check.  You need 12 months cancelled checks in order for rental verification to be valid unless your landlord is a licensed property management company.

4. My borrowers had a 20% plus percent wage reduction and several lenders considered them as irresponsible.

5. Several lenders considered that my client bailed.

Luckily, everything went fine and we ended up closing the loan on September 30th, 2013.

On this particular case scenario, the risk versus reward factor applies.  My client purchased a home over six months ago and took a major risk by putting down a 10% non refundable down payment to a home building.  Home values in Florida were still low at that time.  As months passed, their home value creeped up and their home is worth more now than what the sales price was.  On the flip side, my borrower has lost sleep for months.  I strongly recommend you do not take my borrower’s approach.

Credit Reports Contain Errors

There are many times after you have waited out your waiting period after a bankruptcy, or foreclosure and get a Fannie Mae Automated Underwriting System denial.  Why?  Many times your credit report contains errors and the Automated Underwriting System goes by the credit reports.  In the event if the credit reporting agencies are reporting a deed in lieu of foreclosure as a foreclosure, you will get a denial by AUS for a after the 2 year waiting period conventional loan with 20% down.   There are other situations where student loans that you are currently paying are reported as it were in collections so you will get denied.  You cannot qualify for a FHA mortgage loan if you are behind on any government loan.  On cases like these, you need to correct your credit report and have the correction reporting on your credit report.  You then need to have your loan officer rerun your credit report and then rerun it through the Automated Underwriting System.  You mortgage loan originator should help you with that.  

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