Significant Derogatory Credit Events
FNMA
The waiting period is measured by the completion, discharge, or dismissal of the derogatory credit event and ends on the date of disbursement, unless DU indicates otherwise.
Derogatory Event
Waiting Period Requirements
Bankruptcy – Chapter 7 or 11
4 years
Bankruptcy – Chapter 13
2 Years from discharge date
4 Years from dismissal date
Multiple Bankruptcy Filings
5 Years if more than one filing within the past 7 years
Foreclosure*
7 Years
Deed-in-Lieu of Foreclosure, Pre-foreclosure
Sale/Short sale, or Charge Off of a Mortgage Account
4 Years or 2 Years with extenuating circumstances*
Foreclosure* – When both a bankruptcy and foreclosure are disclosed on the loan application, or when both appear on the credit report, the lender may apply the bankruptcy waiting period if the lender obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting period must be applied.
Extenuating Circumstances* – Refer to FNMA extenuating circumstances documentation requirements, B3-5.3-08: Extenuating Circumstances for Derogatory Credit. Written explanation(s) and documentation must fully support, confirm the nature of the event that led to the derogatory event and illustrate the borrower had no reasonable options other than to default his/her financial obligations.
FHLMC
For Accept Mortgages, LP has determined that the borrower’s credit reputation is acceptable. The waiting period is measured by the completion, discharge, or dismissal of the derogatory credit event and ends on the date of the credit report. In cases where LP may not be property reading the derogatory credit event or cannot make the correct application of the derogatory credit event, the following waiting periods must be applied manually. Note that manual application does not mean that a manual underwrite is allowed. LP must always issue an Accept recommendation in order to proceed.
Derogatory Event
Waiting Period Requirements
Foreclosure
7 Years from the completion date as reported on the credit report
Deed-in-Lieu of Foreclosure
4 Years from the execution date
Short Sale
4 Years from the completion date
Bankruptcy (other than a Chapter 13 Bankruptcy)
4 Years from the discharge or dismissal date
Chapter 13 Bankruptcy
2 Years after the discharge date
• 4 Years from the dismissal date
Multiple Bankruptcy Filings in the Past 7 Years
5 Years from the most recent discharge or dismissaldate
Other Significant Adverse or Derogatory Credit Information
4 Years from the most recent significant adverse or derogatory credit information
FHA
The waiting period is measured by the completion, discharge, or dismissal of the derogatory credit event and ends on the case number assignment date. A manual underwrite is required for any loan where an exception to the waiting period requirements is considered.
Derogatory Event
Waiting Period Requirements
Exceptions
Foreclosure (Including deed-in-lieu of foreclosure)
3 Years
An exception to the 3-year requirement may be granted if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has reestablished good credit since the foreclosure. Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower’s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed. The inability to sell a property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.
Short Sales
A borrower is not eligible for a new FHA mortgage if he/she pursued a short sale agreement on his/her principle residence simply to:
- Take advantage of declining market conditions, AND
- Purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.
Manual underwrite allowed when Short Sale is within 3 years at the time of the case # assignment date if the borrower was current at the time of short sale:
- Mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, AND
Installment debt payments for the same time period were also made within the month due
Borrower in Default at the time of short sale:
A borrower in default on his/her mortgage at the time of the short sale (or preforeclosure sale) is not eligible for a new FHA mortgage for 3 years from the date of the pre-foreclosure sale.
Note: A borrower who sold his/her property under FHA’s pre-foreclosure sale program is not eligible for a new FHA mortgage from the date that FHA paid the claim associated with the preforeclosure sale.
A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the:
- Default was due to circumstances beyond the borrower’s control, such as death of a primary wage earner or long-term uninsured illness, AND
- A review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.
- Divorce is not considered an extenuating circumstance. An exception may be granted where a borrower’s loan was current at the time of borrower’s divorce, the ex-spouse received the property, and there was a subsequent short sale.
- The inability to sell a property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance
Chapter 7 Bankruptcy
2 Years since discharge
An elapsed period of less than 2 years but not less than 12 months may be acceptable if the borrower:
- Can show that the BK was caused by an extenuating circumstance beyond his/her control, AND
- Has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.
Note: The DE UW most document that the borrower’s current situation indicates that the event which led to the BK are not likely to recur.
Chapter 13 Bankruptcy
2 Years since discharge
- If the BK has not been discharged for at least 2 years, the loan must be downgraded to a Refer and evaluated by a DE underwriter.
In cases where the BK has not been discharged for 2 years, a borrower is not disqualified provided that the following is documented:
- One year of the pay-out period under the BK has elapsed,
- The borrower’s payment has been satisfactory and all required payments have been made on time, AND
- The borrower has received written permission from the BK court to enter into the mortgage transaction.
Note: The BE UW must document that the borrower’s current situation indicates that the events which led to the BK are not likely to recur
Consumer Credit Counseling
Participating in a CCC program does not disqualify a borrower provided the following is documented:
- One year of the pay-out has elapsed under the plan,
- The borrower’s payment performance has been satisfactory, and all required payments have been made on time, AND
- The borrower has received written permission from the counseling agency to enter into the mortgage transaction.
Note: A borrower’s decision to participate in CCC does not trigger a requirement for additional documentation, as the credit scores already reflect the degradation in credit history. A manual downgrade is not required of TOTAL scorecard issues an Approve/Accept recommendation. No explanation or other documentation is need for TOTAL approve/Accept Recommendation.
VA
The waiting period is measured by the completion, discharge, or dismissal of the derogatory credit event and ends on the loan application date. However, loans that do not meet the seasoning requirements as of the loan application date can be considered on a case-by-case basis. A manual underwrite is required for any loan where an exception to the waiting period requirements is considered.
Derogatory Event
Waiting Period Requirements
Exceptions
Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law (e.g. Chapter 7)
2 years since discharge
If the BK discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:
- The applicant or spouse has obtained consumer items on credit subsequent to the BK and has satisfactorily made the payments over a continued period, AND
- The BK was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
If the BK was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if:
- The applicant obtained a permanent position after the business failed,
- There is no derogatory, credit information prior to self employment,
- There is no derogatory credit information subsequent to the BK, AND
- Failure of the business was not due to the applicant’s misconduct.
If a borrower or spouse has been discharged in BK within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.
Chapter 13 Bankruptcy
This type of filing indicates an effort to pay creditors. Regular payments are made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to pay off scaled down or entire debts.
If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit.
If the applicant has satisfactorily made at least 12 months worth of the payment and the Trustee or Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.
Consumer Credit Counseling
If a veteran, or veteran spouse, have prior adverse credit and are participating in a Consumer Credit Counseling plan, they may be determined to be a satisfactory credit risk if they demonstrate 12 months’ satisfactory payments and the counseling agency approves the new credit.
If a veteran, or veteran spouse, have good prior credit and are participating in a Consumer Credit Counseling plan, such participation is to be considered a neural factor, or even a positive factor, in determining creditworthiness. Do not treat this as a negative credit item if the veteran entered the Consumer Credit Counseling plan before reaching the point of having bad credit.
Foreclosure, Pre-foreclosure, deed-in-lieu of foreclosure, and short sales
2 Years
Apply the same guidelines as the “Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law” guidelines referenced above.
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan, Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.
Types of Bankruptcy
Chapter 7
Gives a trustee the power to distribute a debtor’s assets to creditors, which wipes out the debt that is owed by the debtor included in the bankruptcy .this type of bankruptcy does not call for repayment of the debt by the debtor.
Chapter 11
A reorganization by a business, allowing the debtor to maintain operating control of the business while restructuring debts and working out a repayment schedule acceptable to the creditors. Also called “debtor in possession.”
Chapter 13
A debt repayment plan where an individual debtor files a budget with the court and agrees to make partial payment to creditors over a three to five-year period. This is normally looked on by underwriters with more favor than the other types of bankruptcies:
- because the borrower pays back a portion of the debt, and
- If the borrower has paid all the payment of the repayment plan “as agreed.”
Judgment
Final determination by a court of the rights and claims of parties to an action. If your borrowers has a judgment filed against him, the underwriter will most likely require that the judgment be satisfied before approving the loan
Foreclosure
A legal procedure in which a mortgaged property is sold in a legal process to pay the outstanding debt in case of default