Many life events affect the ability of your buyers to purchase a property. The most common of these are bankruptcies, short sales and foreclosures.
While it is the mortgage professional’s job to determine who is qualified for a mortgage and who isn’t, at the same time, you, as an informed real estate agent, should be able to determine how likely your potential clients are to be able to continue with the process.
For clients who are coming out of any of these situations and seeking a mortgage program, you may want to suggest they look first at the Federal Housing Administration (FHA) home loans and then at conventional mortgages.
The FHA guidelines are much more lenient, although FHA loans are also more costly to obtain than Fannie Mae or conventional mortgages after bankruptcies, short sales and foreclosures. In this article we’ll focus on FHA loans.
Regardless of which program your buyers choose, the emphasis will be on what they are doing now to ensure that events don’t repeat themselves. A strong recent payment history and proof they are not overextended are paramount in proving to a lender that they are once again creditworthy enough to take on a home mortgage.
There are two basic types of bankruptcies: one where debt is wiped clean (Chapter 7) and another where there is a payment plan or a restructuring takes place (Chapter 13).
In general, people will need to wait two years to apply for a loan after the discharge date of a Chapter 7 bankruptcy and one year after Chapter 13, providing they have documentation from the court or some type of court appointee proving they’ve met all scheduled payments on time.
Despite the fact that your client sold his or her home through a short sale, the lender still took a loss on the property. While lenders generally don’t view a short sale as being as serious as a foreclosure, they do want to give potential buyers a cooling-off period before buying another home.
Currently, waiting time for FHA loans is three years. In most cases, and depending on their credit scores, borrowers will need a minimum down payment of 10%.
In the hierarchy of things that will impact a person’s ability to purchase a home, a foreclosure is at the top of the list. In this case, the mortgage was basically a write-off for the previous lender, and unlike with a short sale, the lender is stuck with the property and all the expenses involved in holding on to it.
Your client can apply for an FHA loan three years after the foreclosure is complete. This is actually mild compared to Fannie Mae’s guidelines, which include a waiting period that may be as long as seven years. Fannie Mae may allow a shorter waiting time for extenuating circumstances such as an event that was beyond your client’s control and adversely affected his or her ability to pay the mortgage.
As these rules do change, ensure you are up to date by regularly consulting your mortgage partner.