Housing Research and Advisory Service Preview!

The Housing Research and Advisory Service has been up and running since the fall, and we would like to take a moment to provide an example of a real-life inquiry and the response we were able to provide. If you are interested in learning more or signing up, please visit the website or contact a Center staff member. 

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Inquiry: It has been reported that FHA and the GSEs will not accept a mortgage to a borrower who has recently gone through a bankruptcy, foreclosure, short sale or deed in lieu procedure, even if their credit has improved and/or they are currently employed. What are the specifics of this policy? When may a borrower become eligible again for FHA/GSE backed mortgages? What is the process for becoming eligible again? How many households are being kept out FHA/GSE backed mortgages because of this policy and is there any way to determine if this policy has an especially harsh effect on low-, moderate-, and middle income households.

Response:                                               

In the aftermath of a personal financial crisis – a foreclosure, short sale or bankruptcy – many people face a period of time during which they cannot secure a mortgage. The recovery time-period varies depending on the organization securing the mortgage, but can be summarized as follows:

• FHA
  • Must wait at least three years after a foreclosure, deed-in-lieu or short sale to qualify for an FHA-insured mortgage, though “extenuating circumstances” can reduce that time.
  • Must wait at least two years after the bankruptcy has been discharged to qualify for an FHA-insured mortgage, though “extenuating circumstances” can reduce that time. For a Chapter 13 filing, some borrowers can receive a mortgage just one year after the initial payments if all have been made on time.
• Conventional Conforming (Fannie Mae)
  • Foreclosure: seven years must have elapsed since foreclosure, though “extenuating circumstances” can reduce that time to three years (for an LTV up to 90 percent).
  • Deed-in-lieu or short sale: a borrower must wait seven years after a deed-in-lieu or short sale to qualify for a conforming loan with Fannie Mae. After two and four years, borrowers can access mortgages with LTV of 80 and 90 percent, respectively. “Extenuating circumstances” mean some borrowers can access a 90 percent LTV mortgage after two years.
  • Bankruptcy: Chapter 7 or 11 bankruptcy requires four years from discharge, which can be reduced to two under “extenuating circumstances”. Chapter 13 bankruptcy requires a two-year period after discharge, which can similarly be reduced.
• Conventional Conforming (Freddie Mac)
  • Foreclosure: seven years must have elapsed since foreclosure, though “extenuating circumstances” can reduce that time to three years
  • Deed-in-lieu or short sale: a borrower must wait seven years for a conforming loan with Freddie Mac. “Extenuating circumstances” can reduce that period to two years.
  • Bankruptcy: Chapter 7 or 11 bankruptcy requires four years from discharge, which can be reduced to two under “extenuating circumstances”. Chapter 13 bankruptcy requires a two-year period after discharge, which can similarly be reduced.

In all cases, good credit must have been re-established.

“Extenuating circumstances” were defined by Fannie Mae as "…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."

Freddie Mac uses a similar standard, and all of the above organizations require detailed documentation of the circumstance. Further information can be found on page 436 here and here.

Data

Data on bankruptcy filings are kept by the federal court system. Current data can be found on their website. Foreclosure data can be found in many locations, including from RealtyTrac, HUD and Foreclosure-Response.org. It is also possible to assess the number of denied mortgages and the reason for denial using data collected through the Home Mortgage Disclosure Act (HMDA), which is publicly available.