The lender must obtain a letter from the borrower explaining the documentation. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower's inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.). If a borrower claims that derogatory information on their Credit Report is the result of extenuating circumstances, the lender must substantiate, and document it. Extenuating circumstances are nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
These changes will apply to Conforming Fixed Rate and Conforming Adjustable Rate Mortgage (ARM) Programs. Fannie Mae Guidelines for Foreclosures, Short Sales, and Bankruptcies will change to the following: So here are the changes, effective with applications dated on or after Fannie Mae is updating the waiting periods. Even Short Sales will be affected the same as foreclosures, which I feel is unfair because they at least try to minimize the loss to the bank, and the bank is involved in the decision. The end result will be that those that have already felt the hardship of losing their home, will continue to experience more hardship in the future. As you will see in the changes below, Fannie Mae is not really making a distinction between foreclosures where the homeowner can no longer make the mortgage payments, and voluntary defaults such as Strategic Defaults (extenuating circumstances are very hard to prove to the satisfaction of Fannie Mae). Those that have tried to justify Strategic Defaults need to seriously rethink their position, because as these voluntary defaults increase the number of foreclosures, additional Guideline changes will follow. So the new Fannie Mae Guidelines for Foreclosures, Short Sales, and Bankruptcies should not come as a surprise. We were warned that as foreclosures increased, that Guideline changes would follow.
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