Fannie Mae changed its longstanding policy of not granting mortgages to people who have filed bankruptcy for a certain number of years by significantly reducing the mandatory waiting period for anyone seeking a mortgage loan after a derogatory credit event, such as Chapter 7 bankruptcy, Chapter 13 bankruptcy or foreclosure.
Importantly, it was the Federal Housing Administration (FHA) that initially changed course and made it easier for individuals to secure loans in the aftermath of a financial hardship. Fannie Mae eventually followed suit.
FHA Sets the Standard with the Back to Work Program
It used to be incredibly difficult for anyone with a troubled financial history to secure a home loan. In 2013, the Federal Housing Administration (FHA), which is part of HUD and provides mortgage insurance on loans offered by approved lenders throughout the United States, recognized the inherent unfairness of continuing to punish individuals simply for declaring bankruptcy and trying to get their lives back on track. So the FHA instituted the Back to Work program, waiving the lengthy waiting period for applying for a home loan after a derogatory financial event.
The FHA’s Back to Work program allows individuals to seek mortgage loans just one year after declaring bankruptcy. Previously, loan applicants had to wait two years before attempting to secure home financing through an FHA-approved lender.
The program also shortened the waiting period for individuals who experienced other types of financial hardships and/or derogatory credit events. Under FHA guidelines, anyone who previously engaged in a short sale, went into foreclosure, conducted a pre-foreclosure sale, went through a loan modification process, went into forbearance on a loan, got a deed-in-lieu of foreclosure or had a mortgage loan charge-off may be eligible for a mortgage loan after waiting just one year.
Prior to the policy change, these individuals had to wait at least three years before applying for a home mortgage. Now borrowers who were forced to deal with extenuating circumstances, such as the death of a wage earner or loss of employment, may be eligible for a loan after a shorter waiting period. However, divorce is not typically considered an extenuating circumstance according to FHA guidelines.
Applicants who wish to take advantage of the FHA Back to Work program must fulfill certain requirements, such as demonstrating that your income was significantly affected by a derogatory credit event, proving that you have fully recovered from the economic hardship and participating in housing counseling before closing on a new home.
FHA vs. Fannie Mae: Securing the Right Mortgage Loan for You and Your Family
Keep in mind that there are differences in the mortgage options available through Fannie Mae and the FHA. For example, securing a home loan through Fannie Mae may require you to provide a down payment of at least five percent. The FHA backs home mortgages with a down payment of just 3.5 percent. Before deciding which program to use, it is important for you to consult with an experienced attorney.
Whether you are a first-time home buyer or a previous homeowner who has recently dealt with financial difficulties, you may be eligible to apply for a mortgage loan to secure a property. A knowledgeable lawyer can help you explore the various mortgage loan programs, including the FHA Back to Work program and Fannie Mae, and determine which program is best for you. Your attorney should also understand the nuances of current home loan laws so you can provide all necessary documentation in support of your loan application.
Joel R. Spivack, Esq. is a knowledgeable bankruptcy and real estate attorney who has helped countless clients get their lives back on track. If you are looking to buy or sell a home, contact him today so he can help guide you through the real estate transaction process.