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What happens to my Credit when I do a short sale, foreclosure or deed in lieu?

Monday, January 29, 2018   /   by Sean Zanganeh

What happens to my Credit when I do a short sale, foreclosure or deed in lieu?

Soooooo It's 2010 and you probably know someone or are someone that has mention the words short sale, foreclosure, or deed in lieu, and you ask yourself, "What happens if I do that?"

Credit?

Can I buy another house?

Will I be sued?

Is this the right thing to do?

Well, all of these are great questions and I found some information on each to shed some light on this issue.

SHORT SALE

How long is the time period after a "short sale" or "preforeclosure sale" before a consumer can be eligible to obtain credit to purchase a property?

Two years from the completion date.  No exceptions are permitted to the 2-year period due to extenuating circumstances.  (Source:  FNMA Announcement 08-16, 6-25-08)

Although the terms preforeclosure and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit.  For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclosure action.  A short sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party.  (Source:  FNMA Announcement 08-16 Q&A, 8-13-08)

FORECLOSURE

How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?


Five years from the date the foreclosure sale was completed.

Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:

  • The purchase price of a principal residence is permitted with a minimum 10 percent down payment and minimum representative credit score of 680.

  • Purchase of a second home or investment property is not permitted.

  • Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

  • Cash-out refinances are not permitted for any occupancy type.


Source:  FNMA Announcement 08-16, 6-25-08

Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the foreclosure?

Yes.  Three years from the date the foreclosure sale was completed.  The same additional requirements apply as listed above except the minimum credit score of 680 is not required.  (Source:  FNMA Announcement 08-16, 6-25-08)

What are "extenuating circumstances"?

Fannie Mae describes "extenuating circumstances" as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result 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 included documents that confirm the event (such as a copy of a divorce decree, medical 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, listing agreements, lease agreements, tax returns, (covering the periods prior to, during, and after a loss of employment, etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation.  The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

DEED IN LIEU OF FORECLOSURE

How long is the time period after a deed in lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?

Four years from the date the deed in lieu was executed.

Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows:

Borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction.
Limited cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time.  (Source:  FNMA Announcement 08-16, 6-25-08)

Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the deed in lieu of foreclosure?

Yes.  Two years from the date the deed in lieu of foreclosure was executed.  The same additional requirements apply as listed above.  (see foreclosure section above for definition of "extenuating circumstances")  (Source:  FNMA Announcment 08-16, 6-25-08)

If you find yourself as someone potentially in these situations, Please have the courage to pick up your phone, send me and email, or just plain reach out to me in some way so I can help assist you through this life changing decision.

Sean Zanganeh

Windermere Exclusive Properties

Realtor Associate & Estate Marketing Specialist

www.seanzanganeh.com

sean.zanganeh@gmail.com

Office:858.521.7281

Personal Cell Phone: 858.229.6063

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My San Diego Dream Home
Sean Zanganeh
12780 High Bluff Dr
San Diego, CA 92130
858-345-9040
CA DRE# #01851910

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