Had a bankruptcy or foreclosure? We have some good news: The Federal Housing Administration (FHA), Fannie Mae and Freddie Mac have all recently announced they were shortening the mandatory waiting period for qualifying for a home loan down to two years after a bankruptcy discharge or foreclosure. FHA announced it was shortening its own minimum waiting period to just one year, in its “Back To Work” program announced last spring.
Under the old rules, each agency imposed a four-year waiting period before they would be willing to approve a new mortgage loan. Fannie Mae reduced the waiting period in 2015, Freddie Mac made the announcement earlier this year, as did the FHA.
That means it’s now much easier for thousands of Americans to get a loan, even after experiencing a significant credit event. The new rules may benefit you if you have undergone any of these processes:
• Deed-in-lieu of foreclosure
• Chapter 7 bankruptcy
• Chapter 13 bankruptcy
• Mortgage loan charge-offs
• Forbearance agreements
The bottom line: It’s still very possible to get approved for a home mortgage, even after a major financial setback like a chapter 7 bankruptcy or having lost your home through a foreclosure—and you won’t have to wait the ten years it takes for a bankruptcy to scroll off your credit report, either. You can still qualify, even if your bankruptcy or foreclosure appears on your report.
Here’s what you need to know:
The first thing is to get back on your feet, get on a sustainable budget and put together your down payment. If you filed under Chapter 7, you’ll need to wait at least two years after discharge for a conventional mortgage, and at least one year to qualify for an FHA loan.
Under the FHA “Back to Work” program, you may be able to qualify for a home loan after as little as one year, provided you meet the following criteria:
• You must have undergone a qualifying economic event;
• You must demonstrate that your income declined by at least 20 percent for at least 6 months, precipitating the economic event;
• You must demonstrate that you have fully recovered from the bankruptcy;
• You must complete a HUD-approved pre-purchase counseling program.
For a conventional loan, plan on a two-year wait. There are a few specialty lenders who will look at more recent bankruptcies, but the major mortgage programs all require at least two years to elapse following a bankruptcy. Terms will usually be much better once those 24 months have passed.
FHA allows borrowers to qualify if they are still in the middle of paying off a chapter 13, but the payments must be verified for at least a year, and only with the approval of the court-appointed trustee overseeing the bankruptcy.
Borrowers still in a Chapter 13 can expect to write a detailed letter explaining the circumstances of the bankruptcy as part of their loan application. You’ll still need to meet the other credit, employment history and debt-to-income guidelines, and to show that the bankruptcy was due to an event beyond your control, such as a major medical event, natural disaster, or job loss.
VA Loan Considerations
With VA loans, you can expect a two-year waiting period after discharge unless – like with FHA loans – you can demonstrate that the bankruptcy was due to an extenuating circumstance beyond your control. You must also make all payments on time for at least 12 months, maintain minimum credit score requirements and pass all the other debt-to-income ratio and employment requirements.
Fannie and Freddie also give more favorable consideration to applications from those who can demonstrate that their bankruptcies or foreclosures were due to extenuating circumstances beyond their control.
Here is a list of Freddie Mac’s specific guidelines, though individual banks and lenders can impose tighter requirements:
With no verifiable extenuating circumstances:
If there are no extenuating circumstances that are verifiable through a third party, you can expect the following waiting periods after these events:
• Previous foreclosure: 84 months from the completion date as reported on the credit report.
• Deed-in-lieu of foreclosure: 48 months from execution date.
• Short sale: 48 months from the completion date.
• Chapter 7 bankruptcy: 48 months after the discharge or dismissal.
• Chapter 13 bankruptcy: 24 months after the discharge or 48 months after dismissal dates.
• Multiple bankruptcies within last seven years: 60 months from the most recent discharge or dismissal date.
• All other significant adverse or derogatory credit information: 48 months.
With extenuating circumstances:
If you can prove the bankruptcy, foreclosure or other negative credit event was beyond your control, you may be able to qualify for these shorter seasoning periods:
• Foreclosure: 36 months from the completion date as reported on the credit report.
• Deed- in-lieu of foreclosure: 48 months from completion.
• Short sale: 24 months from completion date.
• Bankruptcy: 24 months after discharge or dismissal.
• All other significant adverse or derogatory credit information: 24 months.
The ’Hard Money’ Alternative
If you have a substantial down payment, you aren’t limited to FHA, Fannie and Freddie-backed mortgages or VA loans. You can also get a private “hard money” loan immediately after bankruptcy. In these cases, you’ll usually need to put up a higher down payment, and the loan is underwritten based on the value of the collateral and not on your income and credit history. That is, the loan is asset-backed. The lender knows they can be made whole by foreclosing on the property if need be, so your credit history is immaterial.
Interest rates will generally be higher for these loans, so it may make sense to wait a year or two after a bankruptcy so you can qualify for conventional, VA or FHA rates.
Meanwhile, if you’re still smarting from a bankruptcy or foreclosure, focus on the basics:
• Pay all your bills on time. This is the largest single factor in the calculation of your credit score.
• Keep your credit utilization ratio below 30 percent at most, and ideally below 10 percent.
• Maintain a steady employment history.
• Build up a healthy down payment.
• Monitor your credit. Pull a free credit report each year using annualcreditreport.com. Monitor it for errors. Make sure all debts that have been discharged or paid off during bankruptcy are recorded as such on your credit report, and that no one has fraudulently taken out new credit in your name.
• Follow these guidelines for building up your credit score.
Whatever your past difficulties, please know you can bounce back. We have helped many people recovering from past bankruptcies, foreclosures and other major challenges get a home loan. It may be possible sooner than you think!
Any questions? Call us today! (949) 290-8582