Loans Ease for Borrowers After Bankruptcy

It has become easier for someone who has filed for bankruptcy or gone through foreclosure to buy a home.

Beginning Saturday, Freddie Mac, the big secondary mortgage market company, shortened the recovery periods for borrowers who have reestablished an acceptable credit rating.

Under Freddie’s new rules, borrowers who had a prior bankruptcy other than Chapter 13 or a foreclosure or who had turned back their house in lieu of foreclosure have to reestablish their credit standing for just four years.

Borrowers who filed a Chapter 13 bankruptcy need only to reestablish credit for two years after discharging the bankruptcy.

Those who had a bankruptcy, foreclosure or executed a deed-in-lieu of foreclosure because of extenuating circumstances need reestablish credit for only two years as well.

Under the old rules, potential borrowers who had declared bankruptcy had to be clean for 10 years, and those who had been through a foreclosure had to be straight for seven years.

The changes, which had been requested by a number of local lenders, were made possible because of improved automated underwriting systems, said John Fisk, executive vice president of Freddie Mac’s single-family securitization group.

“We now believe that the additional risk of shorter recovery periods is acceptable, so we’re modifying our criteria,” Fisk said.

Freddie Mac and Fannie Mae are government-sponsored enterprises that keep mortgage money flowing by purchasing loans from local lenders and packaging them into securities for sale to investors worldwide.

There is no word yet on whether Fannie Mae, the larger of the two companies, will make similar changes to its guidelines. But the two companies’ rules are similar in many other regards, so it is possible.

The changes apply only to loans secured by one-to-four family primary residences and second homes. Mortgages on investment properties are not included.

Although the changes will make it easier for borrowers with poor credit records to qualify for loans, they “don’t diminish” the fact that significant derogatory information in a borrower’s history increases the likelihood of default, Freddie Mac’s Fisk added, explaining why a more thorough review is necessary.

To be sure borrowers have reestablished acceptable credit after experiencing a significant financial event, Freddie Mac is requiring underwriters to make certain all accounts are current and that the borrower has a minimum of either three credit-based trade lines or four non-credit payment references.

In addition, each of the payment references must have been active within the most recent 24-month period and at least one has to have been open for 24 months. One of the references has to be housing-related.

Lew Sichelman is a syndicated real estate columnist. He can be contacted via e-mail at LSichelman@aol.com.