Understand the consequences of foreclosure

By Robert Nusgart The Daily Record Newswire Before the housing market took such a tumble and before millions of homeowners saw equity in their homes vanish in a blink of an eye, the idea of walking away from their mortgage was inconceivable to most borrowers. Yet as this drama has unfolded, more and more homeowners who found themselves throwing good money after bad came to the realization that their only way out was to go into foreclosure, orchestrate a deed in lieu of foreclosure or negotiate a short sale. Simply, they had to pick their poison. I've had numerous questions over the years asking about the impact on people's credit and also the consequences when a house is sold or returned to the lender under less than desirable circumstances. As one would expect, there are various levels of "punishment." Will a short sale hurt a person's credit score? Absolutely. But to what extent depends on the rest of a person's credit profile? But the bigger question that homeowners ask is: "When will I be able to buy a home again?" Again, it depends on the circumstances in how the previous home was disposed and why the borrower had to go into foreclosure or turn the deed over. During the last several years, Fannie Mae, Freddie Mac, the Veterans Administration and FHA have wrestled with this moral dilemma. The agencies have changed their guidelines over time so that the following are now in place. The most lenient are loans insured by the Federal Housing Administration and the Veterans Administration. Here are their guidelines on how long it takes to buy another house: FHA -Foreclosure: 3 years. -Deed-in lieu: 3 years. -Short sale: 3 years. -Bankruptcy (Chapter 7): 2 years from bankruptcy discharge. -Bankruptcy (Chapter 13): 2 years from bankruptcy discharge for automatic approval. VA guaranteed loan -Foreclosure: 2 years. -Deed-in lieu: 2 years. -Short sale: 2 years. -Bankruptcy (Chapter 7 or 11): 2 years from bankruptcy discharge. -Bankruptcy (Chapter 13): 2 years from bankruptcy discharge for automatic approval. Conventional loans, Fannie Mae and Freddie Mac guidelines -Foreclosure: 7 years for full eligibility for both agencies. -Deed-in Lieu: 7 years for full eligibility with Fannie Mae and 4 years for Freddie Mac. Partial eligibility with Fannie Mae is available after 4 years for up to 90 percent loan to value and 2 years for up to 80 percent loan to value. -Short Sale: 7 years for full eligibility with Fannie Mae and 4 years for Freddie Mac. Partial eligibility with Fannie Mae is available after 4 years for up to 90 percent loan to value and 2 years for up to 80 percent loan to value. -Bankruptcy (Chapter 7 or 11): 4 years from bankruptcy discharge or dismissal with Fannie Mae and Freddie Mac -Bankruptcy (Chapter 13): 2 years from bankruptcy discharge (4 years from bankruptcy dismissal) for automatic approval with Fannie Mae or Freddie Mac. Conventional high balance loans Loan amounts from $417,001 to $494,500 in the Baltimore metro area that will be purchased by Fannie Mae or Freddie Mac: -Foreclosure: 7 years. -Deed-in-lieu: 7 years. -Short sale: 7 years. -Bankruptcy: 7 years. So there are the general time limits before one can re-enter the housing market. However, there are always exceptions to shorten the time period if the borrower had to sell or leave the home under "extenuating circumstances." These extenuating circumstances are defined as nonrecurring events that are beyond the borrower's control that resulted in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower's claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns covering the periods prior to, during and after a loss of employment). The responsibility is on the borrower to substantially prove that these events took place and that the ill-fortune was not due to financial mismanagement. The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of the extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and show that the borrower had no reasonable options other than to default on his or her financial obligations. Yet even providing these documents does not necessarily mean a positive outcome. It still comes down to an underwriter's decision. Leaving a home under duress is difficult, but it is imperative to understand the consequences of making such a move. ---------- Robert Nusgart is a loan officer with Mortgage Master Inc. in Baltimore. He can be reached at 443-632-0858 or by email at rnusgart@mortgagemasterinc.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news. Published: Fri, Jul 6, 2012