Home Loss has Its Consequences

July 9, 2010
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Credit Consequences of Home Loss

Financially distraught homeowners must consider choices that have both tax and credit implications and not only face the painful personal circumstances.

In recent times, the legal department of the California Association of Realtors® (CAR) issued a memorandum titled “Credit After Foreclosure, Bankruptcy, or Short Sale,” it is a very useful document for those who have questions about how credit is affected by the various ways in which one might lose his or her home.

The memo is basically based on the 2008 update of Fannie Mae guidelines (Fannie Mae Announcement 08-16), so it should be clear that the explanations are not completely general or unqualified.

For instance, it is said that a person is not eligible to obtain a home loan for a certain number of years, which means that Fannie Mae won’t buy a home loan made to that person during that time. Granted, most lenders want to be able to sell their loans to Fannie Mae or Freddie Mac (whose rules tend to be similar), but there might be portfolio lenders or other institutions that would make such a loan.

With that, it is worthwhile to review the contents of the memo.

Five years after a foreclosure, a consumer may be eligible to obtain a home loan. Of course, certain restrictions may apply. At least a ten percent down payment is required, and a minimum credit score of 680. Also, purchase of a second home or investment property is not permitted.

A consumer may be eligible three years after foreclosure if “extenuating circumstances” had led to the foreclosure.

Four years after giving a deed-in-lieu of foreclosure, a consumer may be eligible for a home loan. If there had been extenuating circumstances, that period is shortened to two years. In the case of a short-sale, when the mortgage had been delinquent, a consumer may be eligible for a home loan two years after completion of the short sale.

In the case of bankruptcies, other than Chapter 13, there is a four year period from the discharge or dismissal date of the bankruptcy before the consumer may be eligible to obtain a home loan.