When Fannie Mae talks about a "derogatory event" on an applicant's credit record, the company is talking about a bankruptcy or a short sale, a deed in lieu of foreclosure, even a zombie foreclosure. These are events that could put a halt to a potential homebuyer's mortgage application. As we said in our last post, these are the events that trigger waiting periods.
The waiting periods vary from event to event, but the longest is seven years. After a homeowner has lost his home to foreclosure, he must wait seven years before he can qualify for a mortgage backed by Fannie Mae. That's a long time for the borrower -- and, it turns out, for the housing market, as well. A rule tweak was in order.
Fannie Mae has introduced new guidelines that reduce those waiting times. The first thing to note is that the trigger for each waiting period has not changed. And the revised waiting periods are only available under certain circumstances -- officially "exceptions for extenuating circumstances" to Fannie Mae and lenders.
Chapter 7 and Chapter 11 Bankruptcy: The waiting period begins the day of discharge or dismissal and lasts four years. The exception is two years.
Chapter 13 Bankruptcy: The waiting period begins the date of dismissal or the date of discharge. If the bankruptcy is dismissed -- that is, if the borrower has not been able to follow the repayment plan and the bankruptcy is dismissed -- the borrower must wait four years. The exception to a Chapter 13 dismissal is two years.
If discharged, the waiting period is two years. There is no exception.
We'll continue this in our next post.
Source: Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events -- Waiting Periods and Re-establishing Credit, July 29, 2014