Ever since the real estate/mortgage market started to unwind (somewhere around 2005-2006) many homeowners have have been ill-advised to intentionally fall behind on their mortgage payments because that was the ONLY way to imitate a loan modification.
While there was some merit to this notion early on, as in many instances your loan servicer’s hands were tied and they were unable to help, this is clearly not the case today. (BTW, the loan servicer is the company to which you mail your mortgage payments.) What I mean by this is that initially the servicer, essentially the borrower’s only point of contact for issues concerning their loan, was unable to renegotiate the terms of the mortgage unless that mortgage was in default. Even then, often times their ability to help was very limited.
Today, however, especially since the implementation of the HASP, falling behind on your mortgage payment is NOT REQUIRED to initiate a loan modification. That being said, please understand that your lender/servicer is NOT REQUIRED to renegotiate the terms of your loan. If they do, it’s a gift and you should consider yourself fortunate in an unfortunate circumstance.
The bottom line is that some borrowers have suffered financial hardships and/or made some very stupid financial decisions that have caused them to suffer financial hardships resulting in payment defaults. However, for anyone not in that situation that is considering an intentional default please read on. Once you see what needs to be done to re-establish your credit you may want to re-think your strategy.
Requirements for Re-Establishing An Acceptable Credit Record For a Mortgage
The following are standard requirements for re-establishing an acceptable credit record. Certain loan programs may contain specific criteria that is more restrictive and/or different from these standard guidelines.
Time Elapsed After a Chapter 7 bankruptcy
In general there must be 24 months or greater from either the discharge or dismissal date. In some instances, however, thee must be 48 months or greater from either the discharge or dismissal date.
Time Elapsed After a Chapter 13 bankruptcy
In general there must be 24 months or greater from either the discharge or dismissal date. In some instances, however, thee must be 48 months or greater from either the discharge or dismissal date.
Time Elapsed After Multiple Bankruptcy Filings Within the Last Seven Years
In general there must be 36 months or greater from the most recent discharge or dismissal date.
Note: The most recent bankruptcy must have been the result of extenuating circumstances. If not, the borrower is not eligible for the 36 months re-establishment period for extenuating circumstances and is required to meet the 60 month re-establishment period requirement for financial mismanagement. If not, there must be 60 months or greater from the most recent discharge or dismissal date.
Time Elapsed After Completion of Foreclosure
In general there must be 36 months or greater and up to 84 months allowed as follows:
For purchase transactions: For principal residences, the borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts).
Must be greater than 84 months if:
The property is a second home or investment property; or
For a cash-out refinance transaction. Must be 60 months or greater or greater than 60 months up to 84 months allowed as follows:
For purchase transactions: For principal residences, the borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts).
The borrower must have the greater of a 680 minimum credit score or the loan program minimum.
Must be greater than 84 months if:
The property is a second home or investment property; or
The loan is a cash-out transaction.
Time Elapsed After Completion of Deed-in-Lieu of Foreclosure
LTVs < 80%:
Must be 24 months or greater.
Greater than 24 months up to 84 months allowed as follows:
For purchase transactions: The borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts).
LTVs > 80%:
Must be 60 months or greater.
Greater than 60 months up to 84 months allowed as follows:
For purchase transactions: The borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts). LTVs < 80%:
Must be 48 months or greater.
Greater than 48 months up to 84 months allowed as follows:
For purchase transactions: The borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts).
LTVs > 80%:
Must be 60 months or greater.
Greater than 60 months up to 84 months allowed as follows:
For purchase transactions: The borrower must contribute the greater of 10% minimum down payment or the minimum required for the loan program (no gifts).
Time Elapsed After Completion of Pre-foreclosure (Short Sale)
LTVs < 80%: Must be 24 months or greater.
LTVs > 80% (Regardless of CLUES, DU, or LP Decision): Must be 48 months or greater. LTVs < 80%: Must be 24 months or greater
LTVs > 80% (Regardless of CLUES, DU, or LP Decision): Must be 48 months or greater.
New Public Records for Bankruptcies, Judgments, or Collections Must have none after date of discharge or completion of plan
60-Day or More Past Due Payments Must have none after date of discharge or completion of plan.
Past Due Housing Payments Must have none after date of discharge or completion of plan.
30-Day Past Due Payments No more than 2 during the most recent 24 months
Borrower’s Existing Credit Obligations - Must be current at the time of application.
Borrower’s Written Statement Must:
- Outline the cause of the financial difficulties, and
- State that the cause was beyond the borrower’s control, and
- State the difficulties are not likely to recur.
Underwriter’s Written Analysis - Must be a complete analysis fully detailing that the borrower has re-established an acceptable credit history.
Credit Requirements -The greater of 680 or the minimum credit score
Requirements for Re-establishing Credit after Bankruptcy or Foreclosure
Must have at least 4 active references that must include:
One traditional credit reference (tradeline) or nontraditional reference for at least 24 months.
The payment references may include an account opened prior to the derogatory information. If payment references are used, they must include:
One housing-related reference for at least 24 months; and
The credit report must not contain multiple revolving accounts with balances at maximum limits that would indicate that the borrower has excessive obligations that could adversely affect the borrower’s ability to repay the mortgage obligation.
It’s a good life!
Randall A Luebke RMA, RFC
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