Q: What additional steps does a lender have to take in order to close a buyer that is buying after a foreclosure or short sale? – CONLON/Christie’s International Realty agent in Chicago

SS: In our industry, every day something can change. Even if a buyer gets pre-approval, they still need to check with me every 30 days because guidelines change. Fannie Mae and Freddie Mac are loans the majority of people want to get, and in July those guidelines changed. You used to have to wait a minimum of four years after foreclosure. Now after a foreclosure, FHA loans are less strict and guidelines are looser. A seven-year waiting period is required and is measured from the completion date of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

There are now exceptions for extenuating circumstances that can lower that waiting period from seven years to just three years. However, the purchase of second homes or investment properties and cash-out refinances (any occupancy type) are not permitted until a seven-year waiting period has elapsed. In terms of borrowing after a short sale, a four-year waiting period is required, though there are again exceptions for extenuating circumstances that can drop that to a two-year waiting period.

Borrowers always want to know what they can expect coming out of Chapter 7, Chapter 13 or a short sale. Chapter 7 and Chapter 13 carry a four-year waiting period, measured from the discharge or dismissal date of the bankruptcy action. Buyers can reestablish credit in some cases after just two years. For instance, if someone has paid their bills on time for 12 months and had no late payments; if they have money saved for a down payment; and if they have the income to qualify for the loan, it’s possible to get a loan. It’s important that they have no “lates.” You want them to be air tight with this second shot at homeownership.

In all cases, the lender must determine the cause and significance of the derogatory information, verify that sufficient time has elapsed since the date of the last derogatory information and confirm that the borrower has re-established an acceptable credit history. The lender must make the final decision about the acceptability of a borrower’s credit history when significant derogatory credit information exists.

Q: My client doesn’t have much money for a down payment but wants buy. Any suggestions? – Berkshire Hathaway HomeServices KoenigRubloff Realty Group agent in Lake Forest

JS: There are several options for clients with little money to put down. The first is to see if they qualify for the Illinois Housing Development Authority’s first-time homebuyer program, which offers down payment assistant. An FHA loan is also a good option, as it only requires 3.5 percent down. If FHA is the best option for the buyer, then my job is to discuss and educate the buyer’s agent and listing agent on the FHA loan process, as there are a lot of people who are not familiar with this loan.

Other options are to discuss with the client the possibility of getting a gift from a family member, borrowing from their 401K and/or working with the client and their Realtor to see if they can negotiate a seller credit to go towards closing costs, which helps lower the amount needed from the buyer.

Q: What is the desired debt to income (DTI) ratio? – Related Realty agent in Chicago

DP: Banks want to make loans with measured risk, and they especially want to make “sale-able” loans. In order for a loan to be such to Fannie Mae, Freddie Mac or HUD, they need to go through an Automated Underwriting Systems (AUS). If the loan is a conforming loan amount of $417,000 or less, it is run through an AUS. The bank receives “findings,” which are the results of this AUS algorithm that dictates the max DTI based on all loan application factors.

In the case of jumbo loans, it strictly depends on the lender or end investor, and the DTI ratio requirement varies. It’s very important to note as well that some lenders have hard stops on DTI, so that’s why it’s important that you pick your lender wisely. There is no set DTI, however. Loans can become a challenge between 43 to 50 percent, and some lenders won’t even lend over 40 percent. It’s worth noting that some lenders will make DTI exceptions based on other compensating factors. It is not unusual for your loan to be denied at one bank and approved at another specifically due to a guideline overlay preventing a certain level of DTI.