After a bankruptcy or foreclosure, you might assume that getting a mortgage would be virtually impossible. There’s no way you could possibly be approved for a loan; after all, it’s commonly assumed that the standard waiting period for an FHA-backed loan is at least three years after the foreclosure or bankruptcy.
Not entirely. Fannie Mae will actually back a loan after a short sale, but you have to prove that the financial issue was a direct result of an “extenuating circumstance.”
How to Use Fannie Mae’s Extenuating Circumstances Clause
Fannie Mae’s Definition of Extenuating Circumstances
To understand the entire subject, it helps to start with what Fannie Mae considers an extenuating circumstance. According to Fannie Mae’s guidelines, extenuating circumstances are “nonrecurring events that are beyond the borrower’s control.” These circumstances then result in a “sudden, significant, and prolonged reduction” in your financial income or a massive increase to your financial expenses.
In other words, Fannie Mae says they are one-time events that either lower the amount you make or increase the amount you have to spend.
So what event could be an extenuating circumstance? A divorce, for starters, is one of the most common. These unfortunate events happen rarely in a person’s life and generally result in a short-lived financial burden, often due to legal bills. Medical events, which can consume a major portion of a person’s income, are also potential extenuating circumstances. A layoff or job severance could also count. The potential situations you could use as an extenuating circumstance really are limitless because Fannie Mae does not have an official list of qualifying events, merely a guideline for defining and verifying them.
What is Not an Extenuating Circumstance?
Just like they don’t have a list of what they are, Fannie Mae doesn’t really have a list of what they are not. But once again you can look at their broad definition and piece together an idea of what won’t qualify. Probably the most important word to consider in their definition is “nonrecurring;” anything that is recurring, therefore, will likely not be accepted.
For example, the legal bills from a divorce may be considered an extenuating circumstance; they are one-time expenses and once paid, they are gone. Alimony or child support after a divorce, however, is recurring, so it’s unlikely that Fannie Mae would accept this as an extenuating circumstance.
How to Get a Mortgage After an Extenuating Circumstance
If you have had an extenuating circumstance in the past, you are not completely handcuffed when it comes to getting a loan. In fact, there are many options available that can help you secure the loan you need to purchase a home or property. However, you’ll have to be fully prepared and organized, and you’ll need to bring the right information to ensure the process goes smoothly.
Bring Documents that Verify the Event:
If you claim that negative information is the result of an extenuating circumstance, your lender will have to verify your claim through a variety of documents.
If your negative financial information is the result of a divorce, for example, you’ll need to bring a copy of the divorce decree. While other divorce-related information may help your chances of getting a loan, Fannie Mae will need, at a minimum, to see the divorce decree in order to support the mortgage.
If the extenuating circumstances came from a medical situation, you will need to bring as much of your medical information as possible. Of course, you should only bring items that relate directly to the situation (you certainly don’t have to share your full medical records with lenders) but having medical reports related to the event, as well as any bills, will increase your chances of approval.
In many cases, the extenuating circumstance was caused by a layoff. In this case, you should have received a notice of the job layoff that you can bring to the lender’s desk. If you do not have this document, you can likely contact your former employer to get a copy of the layoff announcement.
Depending on the situation, there are other documents that may be needed, but essentially the first step is to verify that the event in question did indeed happen.
Confirm Your Inability to Resolve the Problem
The event by itself is not considered by Fannie Mae to be enough justification for the financial troubles. After all, it is possible (however difficult) to recover from a job layoff or divorce and regain your financial stability. Under this logic, Fannie Mae will want to see that there were factors that caused you to be unable to resolve the financial problems that resulted from the event.
Copies of insurance papers, for example, can demonstrate that medical bills, which were not covered by insurance, created a significant financial burden. Be sure to bring any insurance or financial papers that may relate to the situation.
Claim settlements, property listing agreements, or lease agreements can all be used to demonstrate that not only did the event occur, but it resulted in significant financial burdens.
If your extenuating circumstance was a result of tax bills or loss of employment, you should bring as many tax return documents as you can. Having information that covers the periods before, during, and after the event will demonstrate that the issue was a short, one-time problem, not a prolonged situation.
Finally, you will need to create a letter that explains the significance of the documentation. This written explanation must back the claims of the extenuating circumstance and re-verify the event that led to the bankruptcy or foreclosure. It will also need to elaborate on the situation and explain that you had no control or “reasonable options” to keep from defaulting on the previous mortgage or loans. You can submit this letter in an email or a physical copy.
Let Us Guide You Through Fannie Mae’s Guidelines
With experience, training, and a dedication to common-sense underwriting, we can help you verify an extenuating circumstance to Fannie Mae.
Contact us today and put our experienced mortgage team to work for you!
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