There are as many myths about bankruptcy and foreclosure as there are about … whatever there are myths about. Before the financial meltdown and the ensuing foreclosure crisis, there may even have been groups of campers sitting around fires late at night telling scary stories about foreclosures.
The tales of terror would go like this: A friend told me that her cousin's neighbors were a really normal family. They kept a nice lawn, and the kids played with the other kids on the block. They put out all the appropriate holiday decorations. Everyone liked them.
Then, one night, the rumor went around the neighborhood that the parents had been laid off from their jobs. Soon, the lawn went to rack and ruin, and the Christmas lights burned out, one by one. The kids didn't leave the house much, but you could see them looking out the windows sometimes, watching their former playmates careening down the neighborhood's perfect sledding hill, until an adult would come up behind them and slam the curtains shut.
A couple of weeks before Christmas, my cousin's friend said her family woke up in the middle of the night. There was a rapping noise that got louder and louder, and then stopped.
The next day, the neighbor family was gone. They just disappeared. Poof. No sign of them anywhere. Except … the sheriff's sale notice was nailed to the door.
The campers squeal in mock mock-terror, and the group reluctantly goes to sleep ... if they can. All they hear is the "knock knock knock" of the deputy at that family's front door.
It doesn't work like that in real life -- at least, not in Minneapolis. In fact, families can emerge from bankruptcy and start to re-establish a solid credit rating fairly quickly. Even homeownership is not a distant dream for the person who has declared bankruptcy or lost a home to foreclosure.
We talked about this in our article, Making Homeownership a Reality After Bankruptcy. And, in the past couple of months, Fannie Mae has adopted a rule that makes homeownership after bankruptcy or foreclosure a lot easier.
Borrowers who look for mortgage loans backed by Fannie Mae can run up against the agency's "significant derogatory event" waiting period. Now, after a bankruptcy or pre-foreclosure, a buyer may qualify for the "extenuating circumstances" exception. Under certain conditions and depending on the borrower's situation, the waiting period may be reduced from seven years to just two years.
To determine if you qualify for a reduced waiting period, you may want to visit with a real estate attorney. Someone who is more versed in government lingo than the rest of us should be able to answer any questions you have.
Source: Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, July 29, 2014