USDA Financing Post Bankruptcy, Foreclosure, or Short Sale

Date: February 1, 2012

The USDA Rural Loan program requires a minimum of three year from the date of a bankruptcy, foreclosure, and shorts sale prior to the borrower being eligible for a USDA Loan. For both a Chapter 7 and 13 bankruptcies the borrower must allow three years from the discharge date prior to submitting a new loan request. If the bankruptcy included a property, whether a primary residence or investment property, the soonest a new loan can be obtained is based on guidelines that address short sales and foreclosures.

When the borrower experienced either a short sale, foreclosure, or surrenders the property through the bankruptcy process there will be a three year waiting period between the date of property transfer from the borrower to a new entity and the date the new loan application can be processed. The date a property is turned over or taken back by the bank that holds the mortgage note is not considered the beginning start date toward counting toward the three years. The only relevant date is the legal recorded transfer date from which the property is transferred out of the borrowers name and either back to the bank that holds the mortgage note or a subsequent homebuyer.

If the foreclosed property was secured by a government backed mortgage loan such as a FHA or VA Loan then the property transfer date is no longer considered relevant. The date that now becomes important is the date that the mortgage lender that holds the mortgage note receives 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. The date of the mortgage insurance claim is identifying through a CAIVRS search which is required on all USDA Loans.

Borrowers who had a previous short sale, foreclosure, or bankruptcy that included real property, will need to document the transfer date of their former property. It is now completely irrelevant to try and establish the date of transfer as the date a bankruptcy was discharged, the sheriff sales date, a deed in lieu of foreclosure was made, etc. If the entity that holds the mortgage note is slow to either transfer the mortgage back into the name of the bank or sell the property, which also triggers a change of ownership, the USDA Underwriter will not be able to approve the loan.

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