Negative Credit Occurrences - Bankruptcy, Foreclosures, and Short Sales

The USDA Loan program has special guidelines as it pertains to Borrowers with a previous negative credit occurrence, such as a bankruptcy, foreclosure, or short sale.

The USDA Rural Loan program guideline will require a minimum three year waiting period after:
  • Discharge date of a Chapter 7 bankruptcy
  • A foreclosure based on the property transfer date, unless the property was included in a bankruptcy
  • Short sale settlement/closing date
For Chapter 13 bankruptcies, USDA Loans are available if the borrower's:
  • Bankruptcy is in progress. The borrower must document 12 monthly on-time payments on the Chapter 13 and receive written permission from the bankruptcy court/trustee to enter into a mortgage loan
  • Bankruptcy plan is completed. The borrower must provide proof that payments to the trustee were paid on-time when the loan application date is 12 months from the bankruptcy discharge date

When the borrower experienced either a short sale, foreclosure, or surrenders the property through the bankruptcy process, USDA requires a three-year waiting period, between the date of property transfer from the borrower to the new property owner, and the date of the new loan application. The most conservative stance by a USDA Loan Underwriter for defining the date of the negative occurrence is the legal recorded transfer date, which is the date the property has been transferred out of the borrower’s name and either back to the bank that holds the mortgage note or a subsequent home buyer. From this date the borrower will not be eligible for a USDA Loan for a period of time no less than three years.

However, one of my investors will allow a Chapter 7 bankruptcy discharge date to be considered the date of foreclosure, provided the borrower didn't re-affirm the mortgage liability. This differs from when the property transfer date is recorded at the County Clerk’s Office. This is especially helpful in circumstances where the home owner legally removed their ownership rights to a property, through a Chapter 7 bankruptcy, but the mortgage lien holder was slow to transfer the mortgage back into the name of the bank or sell the property.

If the foreclosed property was secured by a government backed mortgage loan such as a FHA or VA Loan, the property transfer date is no longer considered relevant. The date that now becomes important, is the date when the mortgage lender that held the mortgage note, received compensation for their mortgage insurance claim through either The Department of Housing and Urban Development for a FHA Loan or The Veterans Administration for a VA Loan. To determine the date of the mortgage insurance claim Millennial Home Loans will complete, what is known as a "CAIVRS" search, which is required on all USDA Loans.

To learn more about the Virginia USDA Guaranteed Loan program please call (540) 328-9889.

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