Tuesday, October 2, 2012

How Will Future Lenders View me After Foreclosure, Bankruptcy, or Short Sale?

Overcoming the circumstances that caused the previous financial issues requires knowing what to expect when reapplying for a mortgage in the future. It is important to understand the process and to be informed about the details of the process in order to become a homeowner again.
 
How long do I have to wait before I can get a mortgage? Most people will use an FHA mortgage because it is the more forgiving than a conventional mortgage, although conventional may allow someone who had an extreme hardship to be eligible 2 years after a short sale, but for the most part FHA is likely to be the route to owning again:
For FHA:
  • Foreclosure – 3 years
  • Deed-in-lieu of Foreclosure – 3 years
  • Short Sale – 3 years, in most cases
  • Chapter 7 Bankruptcy – 2 years
  • Chapter 13 Bankruptcy – 1 year
  • Credit Counseling Plan – 1 year

Coming out of a major financial setback can feel like an uphill climb, but it is not insurmountable. In fact,  there will be a point in time and beyond when nothing from that time frame of financial difficulty will even appear on the credit report. For most items it will expire off the credit report within 7 years, the worst case scenario is 10 years when it comes to a Chapter 7 bankruptcy.
 
Late payments, collections, charge-offs (debt written off and sent to collection), foreclosure, defaults, chapter 13 bankruptcy, etc. will all come off the credit report after 7 years.
 
Chapter 7 bankruptcy falls off the credit report after 10 years.
 
It is critical, after a serious derogatory credit event, to be PERFECT moving forward. If you go through a foreclosure, but then for the next 12 months following you have other derogatory items reported on your credit report, this can severely lessen your likelihood of being approved for a mortgage 3 years later. In the case of a bankruptcy, you get a second chance, but even one late payment or one collection after the bankruptcy could derail the possibility of getting approved for a new mortgage.

When there has been derogatory credit in the past, it will almost always have to be fully explained in a written letter.

Lenders must document their analysis as to whether the late payments were based on a:
  • disregard for financial obligations
  • an inability to manage debt
  • factors beyond the control of the borrower (extenuating circumstances).
Extenuating Circumstances: nonrecurring events that are beyond the applicant’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. These cannot be solely defined by the event itself; all circumstances must be taken into consideration.
 
What the underwriter is looking for is:
  • WHY the derogatory event occurred
  • WHY it was out of my control
  • WHY it is unlikely to happen again
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.





Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com


© Copyright 2012 Patrick Ritchie All Rights Reserved




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