We have been talking about bankruptcy and foreclosure and waiting periods -- and, of course, Fannie Mae's decision to adopt separate waiting periods for people who can prove that the "derogatory event" on their credit reports was the result of extenuating circumstances.
Whatever that means, right?
Fortunately, Fannie Mae has defined the term for us and has offered guidance about how to prove to a mortgage lender that the financial hardship was, indeed, an extenuating circumstance.
Extenuating circumstances are those things that happen once but cause immense financial hardship. The key is that the event is out of the borrower's hands -- it's something the borrower had no control over. Losing a job or having a serious injury or illness could qualify. The event must have caused "a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations," as Fannie Mae puts it.
Lenders, of course, will ask for proof. Borrowers need to back up their request for the exception by providing documentation -- a divorce decree, medical bills, employment termination notice or severance agreement are examples. A basic rule of thumb is that the borrower should provide the lender with copies of the same documents that let the borrower know he or she was in for some financial trouble.
There must also be proof that the borrower was unable to resolve the financial crisis that resulted from the divorce, illness, layoff, etc. Tax returns, lease agreements and insurance settlement documents are just a few examples. If a layoff were the "nonrecurring event," then tax returns from before and after the layoff would be the type of documentation the lender would need.
The exception makes sense for a number of reasons. Some people are able to get back on their feet quickly after a catastrophic event. The housing market is recovering slowly, and Fannie Mae needs more business -- offering debtors a chance to enter or re-enter the market is good for everyone.
Source: Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, July 29, 2014