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Consequences of foreclosure can be lasting

The mortgage mess has now evolved into the foreclosure mess.

With Bank of America and other major lenders re-examining the apparently faulty paperwork done in foreclosing on thousands of homes, there surely will be consequences — for the lenders, servicers, homeowners and the people who are in the process of purchasing foreclosures.

This timeout to re-examine the whole process is the correct thing to do. Requiring a complete moratorium is not the answer. Foreclosures are a part of the process, and the thousands of homes that are in foreclosure and are a part of the “shadow inventory” need to keep moving through the process so that this episode in American housing history eventually comes to an end.

Short sales. Foreclosures. Bankruptcy. All have an impact on every aspect of the housing industry. But homeowners going through these issues may not realize the impact on them. Certainly, they know the outcome will not be good, but for how long: how long before they can re-enter the home-buying market after declaring bankruptcy or going through a short sale.

Getting these people healed again and allowing them to be part of the buying market will also mark part of the recovery of the housing industry.

Therefore, here is a brief look at the consequences of being involved in a short sale, bankruptcy or foreclosure. The following outlines the timeframe Fannie Mae, FHA and the Veterans Administration will require before a borrower can qualify for another home.

Fannie Mae

– For a Chapter 7 or 11 bankruptcy, a borrower must wait four years from their discharge date.

– For Chapter 13 bankruptcy, two years from discharge date.

– If there are multiple filings, five years if there has been more than one filing in the last seven years.

– For a foreclosure, a borrower must wait seven years before getting a loan guaranteed by Fannie Mae. The period can be dropped to three years if the borrower can document extenuating circumstances.

– For a deed-in-lieu of foreclosure, a borrower must wait two years and must put down 20 percent.

– If they are involved in a pre-foreclosure sale, then they must wait four years and are required to put down at least 10 percent.

– A short sale can prevent a borrower from purchasing a home for up to seven years, depending on how much money they have as a down payment.

FHA

– For a Chapter 7 bankruptcy, a borrower is eligible after two years from his discharge date.

– For Chapter 13, one year under the reorganization must have elapsed with a satisfactory payment history, and the borrower must get permission from the court to enter into a mortgage.

– For a foreclosure, three years from completion date.

– For a short sale, there is no restriction if the borrower was current on their mortgage and all installment payments at the time of the short sale. Also, the proceeds from the short sale must serve as payment in full. Otherwise, it is three years from the completion date of the short sale.

VA

– For a Chapter 7 bankruptcy, a veteran has to wait two years from the discharge date.

– For Chapter 13, the same as FHA.

– For a foreclosure, two years from the completion date.

– For a short sale, there has not been a specific time set, but it is recommended to use the foreclosure guideline.

After going through either a foreclosure, short sale or a bankruptcy, it is easy to see lenders wanting borrowers to have a cooling-off period. But even if a borrower waits the necessary time, he has to realize that his credit score will suffer. Therefore, during that time, the borrower has to ensure that all other aspects of his credit profile are maintained perfectly and perhaps even show new credit being established with a flawless payment history.

If not, then regardless a short sale or foreclosures, they will remain renters.

Robert Nusgart is a loan officer with Prospect Mortgage LLC., which is associated with The Strata Group in Baltimore. He can be reached at 443-632-0858 or by e-mail at Robert.Nusgart@prospectmtg.com.