The guidelines for waiting periods after bankruptcy are almost as confusing as the guidelines for short sales and foreclosures. The guidelines will be provided in two parts so as to keep things short and simple. This post will address conventional loans and tomorrow I will develop the guidelines for FHA, USDA/RD and VA.
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As George Souto has provided a wealth of information about waiting periods after a short sale or foreclosure to apply for various types of mortgage loans, you need to be aware that there are also waiting periods after going through a bankruptcy. The guidelines for waiting periods after bankruptcy are almost as confusing as the guidelines for short sales and foreclosures. The guidelines will be provided in two parts so as to keep things short and simple. This post will address conventional loans and tomorrow I will develop the guidelines for FHA, USDA/RD and VA.
To understand fully these waiting period guidelines, you need to be aware of the different types of bankruptcy proceedings. A Chapter 7 proceeding is a liquidation of the debtor's assets and the debts are discharge, with any available assets being divided among the creditors based on the class of the creditor's debt. In a Chapter 13 proceeding, the debtor's obligations are restructure and monthly payment amounts are adjusted so that the debtor pays his debts in full over a period not to exceed five years, under the supervision of the bankruptcy court. A Chapter 11 filing is for businesses and involves a restructuring of the debtor's obligations. Generally, bankruptcy filings do not affect secured debts.
For conventional loans that are sold to Fannie Mae, there is a 4 year waiting period for Chapter 7 and Chapter 11 bankruptcy proceedings, except that if there are extenuating circumstances the waiting period is reduced to two years. Fannie's guidelines do not state whether that is four years after dismissal or discharge of from the date of filing. It would be a safe assumption that the date of discharge or dismaissal would be the applicable start date to determine the actual waiting period for a particular potential borrower For Chapter 13 proceedings, the waiting period is two years after a discharge or four years after a dismissal. In other words if a potential borrower who went through a Chapter 13 proceeding did not complete the payment plan and his petition was dismissed, that person must wait longer than the person who successfully completed the bankruptcy payment plan. If the potential borrower has filed more than one bankruptcy petition within the seven year period prior to the loan application, that person will be subject to a waiting period of five years, except that if there are extenuating circumstances, the waiting period will be three years from the most recent discharge or dismissal.
Lenders do have the option to extend the waiting periods under their own underwriting standards. They do not have the ability to shorten the waiting periods except for extenuation circumstances. The FNMA guidelines define extenuating circumstances as, "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."
In case you missed the series of blogs by George Souto on waiting periods for short sales and foreclosures, his blogs can be found HERE.
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