Credit After Foreclosure, Bankruptcy, or Short Sale

Credit After Foreclosure, Bankruptcy, or Short Sale: "Member Legal Services
Tel 213.739.8200
Fax 213.480.7724
May 12, 2009

Copyright© 2009, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited withoutthe express written permission of the C.A.R. Legal Department. All rights reserved.

One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale (referred to as a 'preforeclosure sale' by Fannie Mae) is the ability to obtain credit to purchase another home. Fannie Mae has updated its credit guidelines. This legal article summarizes those guidelines.

Q 1. How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?

A Five years from the date the foreclosure sale was completed.

Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:

. The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum representataive credit score of 680.

. Purchase of a second home or investment property is not permitted.

. Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

. Cash-out refinances are not permitted for any occupancy type.

(Source: FNMA Announcement 08-16, 6-25-08 )

Q 2. Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?

A According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires only a 7-year history to be reviewed for all credit and public record information. The 7-year timeframe also aligns with the information provided by the borrower on the loan application relative to disclosure of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09. )

Q 3. Does a shorter time period apply if the borrower has 'extenuating circumstances' that led to the foreclosure?

A Yes. Three years from the date the foreclosure sale was completed. The same additional requirements apply as listed in Question 1 except the minimum credit score of 680 is not required. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 4. What are'extenuating circumstances' ?

A Fannie Mae describes 'extenuating circumstances' as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower's claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

(Source: FNMA Selling Guide, 4-1-09 at 391. )

Q 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the date the deed-in-lieu was executed.

Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows:

. Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment ro the minimum down payment required for the transaction.

. Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time.

(Source: FNMA Announcement 08-16, 6-25-08. )

Q 6. Does a shorter time period apply if the borrower has 'extenuating circumstances' that led to the deed-in-lieu of foreclosure?

A Yes. Two years from the date the deed-in-lieu was executed. The same additional requirements apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of 'extenuating circumstances.'

Q 7. How long is the time period after a 'preforeclosure sale' before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the completion date. No exceptions are permitted to the 2-year period due to extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 8. What is a 'preforeclosure sale' mentioned in Question 6 and is that the same as a short sale?

A 'A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer' (Source: FNMA Announcement 08-16, 6-25-08 ).

Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit. For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action. A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to faciiate the sale of teh property to a third party. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 9. Does a shorter time period apply if the borrower has 'extenuating circumstances' that led to the preforeclosure (short) sale?

A No. There are no exceptions to the 2-year time period. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 10. If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A The loan will be eligible for delivery to Fannie Mae provided that the borrower's previous mortgage history complies with Fannie Mae's excessive prior mortgage delinquency policy--that is the borrower does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date--and the borrower has not entered into any agreement with the short sale lender to repay any amounts assoicated with the short sale, including a deficiency judgment. (Source: FNMA Announcement 08-16 Q&A, 8-13-08 ; FNMA Selling Guide, Part X, Chapter 3, Section 302.09. .)

Q 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit report?

A Preforeclosure sales may be reported as 'paid in full' with a 'settled for less than owed' remarks code, and the mortgage tradeline would indicate any recent delinquency. A deed-in-lieu may be reported by a remarks code indicating a deed-in-lieu. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 12. How long is the time period after a bankruptcy (all except Chapter 13) before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the discharge or dismissal date of the bankruptcy action (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 13. How long is the time period after a Chapter 13 bankruptcy before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the discharge date and four years from the dismissal date (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 14. Does a shorter time period apply if the borrower has 'extenuating circumstances' that led to the bankruptcy (all actions)?

A Yes. Two years from the discharge or dismissal; however, no exceptions are permitted to the 2-year time period after a Chapter 13 discharge (Source: FNMA Announcement 08-16, 6-25-08 ).

See Question 4 for the definition of 'extenuating circumstances.'

Q 15. How long is the time period after multiple bankruptcy filings before a consumer can be eligible to obtain credit to purchase a property?

A Five years from the most recent dismissal or discharge date for borrowers with more than one bankrutcy filing within the past 7 years (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 16. Does a shorter time period apply if the borrower has 'extenuating circumstances' that led to the multiple bankruptcies?

A Yes. Three years from the most recent discharge or dismissal date. The most recent bankruptcy filing must have been the result of extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of 'extenuating circumstances.'

Q 17. What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

A Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of his or her obligations over a period of up to five years. A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower's debts. Chapter 7 is a relatively quick liquidation process that is generally completed within 120 days. Chapter 7 cases are rarely dismissed. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 18. What is the difference between a Chapter 13 dismissal and a Chapter 13 discharge?

A A borrower who files a Chapter 13 can dismiss the case at any time (voluntary dismissal) or the case may be dismissed by the court based on the borrower's failure to comply with the requirements of the Bankruptcy Code or to make the required payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan. A borrower who doesn't make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a certain amount of the payments and the borrower's failure to make all of the payments was due to circumstances beyond the borrower's control. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 19. What are the requirements to re-establish a credit history?

A After a bankruptcy or foreclosure-related action, a credit history must meet the following rquirements to be considered re-established:

. It must meet the requirements for elapsed time (as discussed in this article.

. It must reflect that all accounts are current as of the date of the mortgage application.

. it must include a minimum of four credit references. At least one of the references must be a traditional credit reference, and one of the references must be housing-related.

A housing-related reference must cover the period following the bankruptcy discharge or dismissal, foreclosure, or deed-in-lieu, and can be in the form of mortgage payments or rental payments.

If rental payments wre not reported to the crdit repositories, the lender must obtain copies of bank statements, money orders, or cnacled checks for the most recent 12-mnth period as a supplement to the rent verification.

. It must reflect three of the four credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.

. It must include no more than two installment or revolving debt payments 30 days past due in the last 24 months.

. It must include no installment or revolving debt payments 60 or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

. It must include no housing debt payments past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

. It must include no new public records since the discharge or dismissal of the bankruptcy or the completion of the foreclousre-related action. Public records include bankruptcies, foreclousres, deeds-in-lieu, preforeclosure sales, unpaid jdugments or collections, garnishments, liens, etc.

(Source: FNMA Selling Guide, 4-1-09 at 392. )

Q 20. Where can I get more information?

A This article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 A.M. to 6:00 P.M. C.A.R. members who are broker-owners, office managers or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or legal_hotline@car.org. Written correspondence should be addressed to:

CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South VirgilAvenue
Los Angeles, California 90020"

New Federal Law Affecting Distressed Properties

From the California Association of Realtors -

LONGER STAY FOR TENANTS OF FORECLOSED HOMES: Effective immediately, an REO lender or buyer who acquires title through a foreclosure sale must give at least a 90-day notice to terminate a bona fide tenant as defined. A 90-day notice to terminate is sufficient for a month-to-month tenant or if a new owner will occupy the property as a primary residence at the end of the 90 days. Otherwise, a tenant with a one year or other fixed-term lease with a remaining lease term exceeding 90 days can stay in the premises until the remaining lease term ends. This new 90-day notice requirement applies to foreclosures of a federally-related mortgage loan or residential real property, except for properties under rent control, rent-subsidized programs (such as Section 8), or other state laws that provide additional protections for tenants. This law expires on December 31, 2012"

It will be interesting to see how this effects san diego real estate. This could keep foreclosure off the market for close to one year. I could see homeowners using this as leverage in short sale negotiations.

san diego short sales

Forclosures program for Renters from fannie mae - Renters can stay in property

Its a good time to be a renter in California.
By my estimate SB 1137 gives you a few free months and now fannie mae says why not stay on as a renter.

Media: News Releases > Fannie Mae Announces National REO Rental Policy

Fannie Mae Announces National REO Rental Policy
Renters in Fannie Mae-Owned Foreclosed Properties
Eligible to Stay in Their Homes

WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today announced the establishment of a new National Real Estate Owned (REO) Rental Policy that will allow qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. The company currently has an eviction suspension in place through the end of January which will allow for the new policy to be fully operationalized prior to the suspension concluding.

"Renters in foreclosed properties have often been a casualty of the foreclosure crisis the country is facing," said Michael Williams, chief operating officer of Fannie Mae. "This policy will allow qualified renters to remain in Fannie Mae-owned properties should they choose to do so, mitigate the disruption of personal lives that foreclosures can cause, and help bring a measure of stability to communities impacted by high foreclosure rates."

The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.

For more info on foreclosure options such as short sales and loan mods.

Short sale and foreclosure warning

Realty Times - Real Estate News and Advice: "Furthermore, you want to make absolutely sure that even should the lender approve the short sale, you will not be obligated to make up this difference, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisors will have to satisfy themselves -- and you -- on this matter."

Other real estate lawyers are starting to warn Realtors (at least implicitly) that the short sale paperwork must be reviewed by an attorney. In California is particular important that a san diego homeseller or a seller in any other part of the state understand what their exposure to deficiency is.

this is becoming my mantra. Because of the protections built into the are of foreclosure law, some Californians are better of accepting a foreclosure than a short sale. Do not do a short sale until you have been advised by someone licensed to give you an opinion which is backe up by mal practice insurance. (in my legal opinion). Too many people have contacted me after it is too late. They did a short sale and now the lender is seeking to collect on the deficiency after a successful short sale

Lenders Not Helping Borrowers Keep Their Homes - Press Release

Survey Results Show Lenders Not Helping Borrowers Keep Their Homes - Press Release: "Only one mortgage counselor reported in CRC's survey that loan modification was a very common outcome presented to borrowers. In fact, counselors reported that the industry as a whole is not consistently modifying loans for long-term affordability, as they claim. When lenders do modify loans for borrowers in early delinquency, or facing unaffordable rate resets, survey results show they are not offering fixed rates for the long term. Counseling groups responded that lenders are only willing to fix interest rates for one year at a time. These short-term modifications are unlikely to solve borrowers' problems, and will most likely only delay the situation, Stein says. CRC's survey also revealed that most counseling agencies do not see lenders reaching out to borrowers before they face problems from rising rates and monthly payments. A surprising 24 of the 33 respondents said that in their experience, the industry as a whole is not contacting borrowers before delinquency."

Fed Banks taking over? Conspiriacy proven?

Bloomberg.com: Worldwide

If you are homeowner contemplating selling your upside down or almost upside down property, is this good news or bad. Countrywide is probably illiquid and who knows how far from being upside down themselves. The question is what are these banks going to get for their cash infusions.

I am know conspiracy theorist but those anti federal reserve bank guys said this was going to happpen. I was wondering how, now we know, they buy the biggest most broke home lender out there. Will they foreclose or will they agree to pre-foreclosure workouts. With one choice we will all be toast. The other probably mean two to three years of short sales and foreclosure before we see a supply demand balance at lower prices.

Short Sales Effect Credit - Impact of Short Sales on Credit Reports - How Short Sales Affect Credit

Lately I have been getting a lot of questions for California Real Estate owners about how a short sale will effect their credit. I am giving a link to this information because I have found some of this realtors information to be pretty good but not perfect in the past. I have also found many Realtor cite making roughly the same claims about the effect on an upside down homeowners credit. However I rarely see the cite attribute the information to anyone.

Next, I note that this information may be old and getting older. As I have reported elsewhere on this blog it has been reported the Fico people are working to make a short sale and a foreclosure have an equivalent effect on your credit report. It makes sense because a short sale is really no better than a deed in lieu. Finally, I would like to remind people that you really need both a Realtor and an attorney working as a team to create your best solution.

Short Sales Affect Credit - Impact of Short Sales on Credit Reports - How Short Sales Affect Credit

here is a summary of what the realtor resported:

Fico points lost:

* Foreclosure or Deed-in-Lieu of Foreclosure
250 t0 280 points
* Short Sale
80 to 100 points
Waiting Period Before Buying Another Home

* Foreclosure or Deed-in-Lieu of Foreclosure
36 months till you can get a reasonable rate on your loan
* Short Sale
18 months
Please remember to make sure you are crafting your solution to eliminate deficiency judgments and/or tax liablity for loan forgiveness. (something you can do by yourself or with your lawyer) If your Realtor claims to be able to negotiate these agreements for you - it may be a good thing - because imo they will be practicing law without a license. Just make sure they work for a large non indenpendent broker with deep pockets.

Real Estate Auctions

Interesting article about foreclosures and auctions. Note, each state has different rules for instance California's rules for redemption by foreclosed former owners are different.


Let the Home Auction Bidder Beware: "'Banks have a duty to bid as much as they are owed' on an outstanding mortgage, says Ryan Slack, chief executive of PropertyShark.com, an online real estate research company in New York City. 'But investors don't want to buy a property unless it's [priced] at a discount,' he adds. Indeed, at a July 13 foreclosure auction at the Queens County, N.Y., Supreme Court building, only four of the 18 properties auctioned that day attracted any bids from the public. The rest, observers said, ended up in the hands of their mortgage lender. But the ability to obtain troubled properties doesn't end there: Some time after the lender takes title to foreclosed properties, a new selling phase typically begins. That's when banks try to shed unwanted properties - typically by selling them through a real estate agent or by offering them at a second auction. These post-foreclosure auctions are attractive to lenders, experts say, because they can unload their mounting stocks of properties on a specific date. Thus, 'you're seeing [post-foreclosure auctions] of 20 to 30 properties at a time, held at conference centers or hotels,' says Rick Sharga, marketing vice president at RealtyTrac Inc., a real estate information company in Irvine, Calif. 'In the past, [such lenders] didn't have enough inventory' to hold such events. For"

Top 10 Foreclosure Cities - Yahoo! Real Estate

Top 10 Foreclosure Cities - Yahoo! Real Estate

California has 4 cites on the to 10 foreclosure list

The top 10 rates of foreclosure are:

1. Stockton
2. Detroit
3. Las Vegas
4. Riverside/San Bernardino
5. Sacramento
6. Bakersfield
7. Denver
8. Miami
9. Memphis
10. Cleveland