We have recently had several mortgage applications from people who have a bankruptcy or foreclosure in their past, and there appears to be a lot of confusion in the market about how long one has to wait after one of those events to apply for a mortgage. So, to help you advise your clients, below is a quick outline of the current guidelines on this topic (which of course are subject to change):
Conventional (Fannie Mae & Freddie Mac) loans
For Ch. 7 or 11 bankruptcies, when there are extenuating circumstances, the guidelines allow for 2 years from discharge. For foreclosures, when there are extenuating circumstances, the guidelines allow for 3 years from completion. The Fannie & Freddie guidelines define “extenuating circumstances” to include divorce, medical bills, job layoff or severance, and similar types of events. For Ch. 13, it is 2 years, regardless of circumstance. For Ch. 7 or 11, without extenuating circumstances, it is 4 years. For foreclosures without extenuating circumstances, it is 7 years.
For all forms of bankruptcy, it is 2 years from discharge. But this can be reduced to 1 year in extenuating circumstances. Also, for Ch. 13, they allow 1 year from pay out period. The FHA guidelines define “extenuating circumstances” to include serious, non-insured illnesses, death of primary wage earner, etc.; and also require that the borrower has re-established good credit. They specifically exclude some circumstances surrounding a job loss or divorce.
For all forms of bankruptcy, it is 2 years, but this can be reduced to 1 year in extenuating circumstances. The VA guidelines define “extenuating circumstances” to include job loss and medical bills not covered by insurance. They exclude divorce. They also provide some leeway in the case of a bankruptcy of a self-employed borrower whose business fails.
For Ch. 7 bankruptcies and foreclosures, it is 3 years. For Ch. 13, it is 1 year from payment completion. The USDA guidelines do not consider extenuating circumstances.
We have additional outside investors that generally follow the above guidelines, but with variations.
My advice is, if you are working with anyone who is approaching a year out of bankruptcy or foreclosure, have them contact us to discuss their situation; and we will be happy to work with them to determine the best route for them to follow.
Take care and feel free to contact us anytime with questions. Thank you.