Fannie Mae Updated Credit Guidelines
The following data was compiled by NPHS regarding updates on Fannie Mae’s credit guidelines and is to our knowledge, the most current information as of the posting date of 11/16/09.
A major concern homeowners facing foreclosure or short sale are troubled over is the impact it has on their credit and their ability to buy a home in the future. The following information, released by Fannie Mae, is a summary of general credit information along with their updated credit guidelines and requirements affecting troubled homeowners.
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 include 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 (e.g., covering the periods prior to, during, and after a loss of employment).
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 his or her financial obligations.
(Source: FNMA Selling Guide, 4-1-09 at 391.)
After a FORECLOSURE, how long is the time period required prior to obtaining a new home loan?
Typically 5 years from the completed foreclosures sale date. However, a shorter time period of 3 years may be allowed in situations where foreclosure was due to extenuating circumstances; in these cases, all requirements still apply with the exception of the 680 minimum FICO.
Because Fannie Mae requires review of the 7 year credit and public record history, the following additional requirements apply up to 7 years following the completion date:
- Principal residence purchase permitted with MINIMUM 10% down payment and minimum credit score of 680.
- Second home or investment property purchases are not allowed.
- 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)
After a Deed-In-Lieu (DIL) of Foreclosure, what time frame is required before obtaining a new mortgage loan?
Typically a four year time period from the date the deed-in-lieu was executed is required. However, in the cases that involved “extenuating circumstances” a minimum 2 year time period may be accepted.
Additional requirements that apply up to 7 years following the DIL date are as follows:
. Property secured purchases require 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 property are permitted and subject to eligibility requirements in effect at that time.
(Source: FNMA Announcement 08-16, 6-25-08)
After a Short Sale or “pre-foreclosure” sale, how long is the time period before a new property can be purchased?
A two year period following sale completion date is required with no exceptions permitted.(Source: FNMA Announcement 08-16, 6-25-08)
Will Fannie Mae purchase the new primary residence loan of a borrower who sold their previous property as a short sale but was never delinquent on that mortgage?
To qualify to be deliverable to Fannie Mae, they require that the borrower is free of any contract or agreement with the previous lender to repay any debt related to the short sale and the mortgage history clear of any 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date.
(Source: FNMA Announcement 08-16 Q&A, 8-13-08; FNMA Selling Guide, Part X, Chapter 3, Section 302.09)
How are short sales or “pre-foreclosures” and deed in lieu of foreclosures reported on a credit statement?
Short sales or Pre-foreclosure sales are typically reported as “paid in full” with a “settled for less than owed” remarks code with the mortgage trade line noting any recent delinquencies. A deed-in-lieu typically appears on a credit report with remarks code indicating a deed-in-lieu.
(Source: FNMA Announcement 08-16 Q&A, 8-13-08.)
After a BANKRUPTCY, how long of a time period is required prior to obtaining credit to purchase a property?
With the exception of Chapter 13 bankruptcy, typically a four year time period from the discharge or dismissal date of the bankruptcy is required prior to obtaining a new mortgage loan. In the case of a Chapter 13 bankruptcy, a two year timeframe from the discharge date or 4 years from the dismissal date is required. However, where extenuating circumstances are involved, a two year from discharge or dismissal may be accepted.
(Source: FNMA Announcement 08-16, 6-25-08)
After multiple bankruptcy filings, what is the time period required prior to purchasing a property?
For borrowers with multiple bankruptcy filings in the past 7 years, typically a five years time period from the most recent dismissal or discharge date is required. A 3 year time period may be accepted in cases where the most recent bankruptcy filing involved extenuating circumstances.
(Source: FNMA Announcement 08-16, 6-25-08)
What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?
Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of their obligations over a period of up to five years. A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower’s debts.
(Source: FNMA Announcement 08-16 Q&A, 8-13-08)
In a Chapter 13 bankruptcy, what is the difference between a dismissal and a discharge?
A Chapter 13 bankruptcy may be dismissed at anytime; by the borrower, as a voluntary dismissal, or by the court if borrower fails to comply with the required payment schedule. Upon completion of the payment plan, the borrower will receive a Chapter 13 discharge. The court may also discharge a Chapter 13 case prior to receiving all scheduled payments if they find that the borrower made a sufficient amount of payments and is unable to continue the plan due to extenuating circumstances.
(Source: FNMA Announcement 08-16 Q&A, 8-13-08)
What is “re-established” credit?
In order for credit to be deemed re-established for a new loan application, the following criteria must be met:
- The minimum time period requirement (case-specific) must have been met.
- All accounts must be current as of the loan application date.
- A minimum of four credit references are required; at least one traditional and one housing-related. The housing-related reference can be in the form of mortgage or rental payments and must be from the period following the foreclosure, deed-in-lieu or bankruptcy discharge/dismissal. If rent payments were not reported on the credit report, borrower must provide rent verification for the most recent 12-month period (bank statements, money orders, cancelled checks).
- No more than two 30-day past due installment/revolving debt payments in the last 24 months.
- No 60-day past due installment/revolving debt payments since the completion of the foreclosure-related action or bankruptcy discharge/dismissal.
- No past due housing debt payments since the completion of the foreclosure-related action or bankruptcy discharge/dismissal.
- No new public records, including bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure sale, judgment or collection, etc. since the completion of the foreclosure-related action or bankruptcy discharge/dismissal.
(Source: FNMA Selling Guide, 4-1-09 at 392)
What is a FICO® Score?
Founded by the Fair Isaac Corporation (known as FICO®), the FICO® score is one of the most widely used credit scoring systems designed to represent an individual’s creditworthiness. The three credit reporting agencies, Equifax, Experian, and TransUnion, collect data to compile credit reports for consumers which are then used to generate an individual’s FICO® score. Each consumer has three separate credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times. A FICO® score is between 300 and 850. The higher your score, the better your credit.
What factors go into determining a FICO® score?
Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are closely-guarded secrets, FICO® has disclosed the following components and the approximate weighted contribution of each:
35% — Payment History – Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a consumer’s FICO® score to drop. Paying bills as agreed over time will improve a consumer’s FICO® score.
30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to the total available revolving credit (credit limits). Consumers can improve their FICO® scores by paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on the FICO® score.
15% — Length of Credit History – As a consumer’s credit history ages, assuming the consumer pays his or her bills, it can have a positive impact on the FICO® score.
10% — Types of Credit Used (installment, revolving, consumer finance) – Consumers can benefit by having a history of managing different types of credit.
10% — Recent search for credit and/or amount of credit obtained recently - Multiple credit inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts, and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short period of time is also viewed as risky and can cause a drop in an individual’s score. However, individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries.
(Source: http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx)
How does a mortgage modification affect my FICO® score?
Dependent on whether and how the lender chooses to report the modification to the credit bureaus, will determine the affect it will have on an individual’s FICO® score and overall credit profile. If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer’s credit report could cause the consumer’s FICO® score to decrease or it could have little to no impact on the score.
(Source: http://www.myfico.com/crediteducation/questions/Mortgage_Modification.aspx)
How does a bankruptcy affect my FICO® score?
Regardless of the type, bankruptcy has a very negative affect on your credit report. As long as the bankruptcy is listed on your credit report, it will be factored into your score.
Typically, you can expect bankruptcies to remain on your credit report, from the date filed, as follows:
- Chapter 11 and Chapter 7 bankruptcies up to 10 years.
- Completed Chapter 13 bankruptcies up to 7 years.
These time periods refer to the public record item associated with filing for bankruptcy however; all individual accounts included in the bankruptcy should be removed from your credit report after 7 years.
(Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx)
How does a short sale, deed-in-lieu-of foreclosure or a foreclosure affect my FICO® score?
Although they may be great alternatives to foreclosure, short sales, and deeds-in-lieu of foreclosure are noted on a credit report as “not paid as agreed” accounts, and unfortunately will all negatively affect your FICO® score. This is not to say that these may not be better options for you from a financial or tax perspective, just that they will be considered no better or worse for your FICO® score.
If you are considering bankruptcy as an alternative to foreclosure, please keep in mind that while a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® score.
(Source: http://www.myfico.com/CreditEducation/Questions/foreclosure-alternatives-fico-score.aspx)
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