Life After Bankruptcy – A Change in Policy by Fannie Mae

Bankruptcy for the average individual can be a devastating event, or as Fannie Mae would put it, a derogatory event. Is there life after bankruptcy? Can you really expect to get things back on track? In the past, a derogatory event could result in a waiting period before a loan could be applied for with Fannie Mae and most other banking institutions. Fannie Mae however has rolled out some changes that might help borrowers get back on their feet sooner rather than later. Rather than waiting the full four years, borrowers will now be able to apply for a mortgage just two years later which is still one year longer than the Federal Housing Administration’s minimum waiting period. Something important to note is that the same change was implemented by the FHA as they launched a ‘Back to Work’ program which permits a borrower to apply 12 months after the derogatory event in question. This could theoretically be a direct response to the poor economy and housing market situation – or in other words, a way to help borrowers with poor credit get back on their feet.

Derogatory Events

What qualifies as a derogatory event exactly? There are a list of five that we would like to note:

• Foreclosure
• Bankruptcy
• Mortgage Loan Charge-Off
• Short Sale
• Deed-in-Lieu of Foreclosure

These fall under the umbrella of extenuating circumstances, but Fannie Mae does provide some stipulations as to what an extenuating circumstance entails>

• Occurs one Time Only
• Beyond he Borrower’s Control
• Results in a Sudden Loss of Income for a Prolonged Period of Time

These three items cover most of it, but there are also instances of increased financial obligation which can include illness, divorce, death, etc. In order to apply to be covered under the extenuating circumstances clause, potential borrowers will need to supply documentation such as medical bills, notice of loss of job, divorce degree, death certificate, and so on.

Not all life events can be considered derogatory. In general, events that qualify are those that will lower an individual’s credit score by 100 points or more. Before taking advantage of the waiting period, however, you may wish to compare the rates of conforming loans simply because they will be dependent upon your credit score.

Conforming Loans and You

If you are attempting to obtain an FHA mortgage there will be no penalty for those with a credit score below 740, but the premiums can be costly later on. The truth is that just like individuals themselves, credit scores and situations are entirely unique and most be taken into account. Bottom line: explore all of your available options before you take out any type of loan – you never know what kind of deals you might find or what sort of money you might save while you are doing it.

If you are planning to take advantage of this program, you will want to make sure you are able to provide a brief letter describing the issues you are having, and once again, understand that this is a one time event that cannot be repeated.

There is definitely life after bankruptcy, or more specifically, the chance to apply for mortgage loans after bankruptcy, with both Fannie Mae and the FHA making it easier than ever before.