There is hope for clients with derogatory trade lines on their credit reports due to bankruptcy or short sale. Fannie Mae has changed it’s mandatory waiting period for borrowers who have experienced a short sale, pre-foreclosure or bankruptcy and who would like to get a new mortgage, according to loan officer and mortgage market expert Dan Green on The Mortgage Reports.

Fannie Mae’s mandatory wait period has been reduced from four years to two, allowing borrowers who have experienced a significant derogatory event to re-apply for a mortgage sooner. The new wait period is just one year longer than the FHA Back to Work program in which certain mortgage borrowers are eligible to apply for a loan just 12 months after a significant derogatory event such as:

  • pre-foreclosure
  • short sale
  • deed-in-lieu of foreclosure
  • bankruptcy
  • mortgage loan charge-off

The new wait period is a major improvement for conventional mortgage borrowers nationwide, according to Green.

Borrowers can apply for Fannie Mae’s extenuating circumstances program loan if they can prove that the hardship occurred just once; was beyond their control; and resulted in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. Examples of extenuating circumstances include divorce, illness, sudden loss of household income or loss of employment.

Mortgage applicants wishing to apply for a loan with extenuating circumstances should be prepared to provide valid documentation in support of the claim, according to Green. These may include a copy of a divorce decree, copies of medical bills and notice of job loss or severance papers.

Green said borrowers should also be prepared to write a brief letter describing the hardship and how it directly led to the bankruptcy, pre-foreclosure, or short sale. The letter should clearly state that the default was the borrower’s only reasonable course of action and that the circumstance was a one-time event. It should also clearly state and prove that the borrower has successfully re-established their credit by paying all financial obligations on time in the months since the event.