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Waiting Periods After Credit Problems Before You Can Apply for a Mortgage

Waiting Periods After Credit Problems Before You Can Apply for a Mortgage

  • How Long Do I Have to Wait After a Foreclosure, Default, Short Sale or Bankruptcy to Apply for a Mortgage?
  • Given the economic recession and collapse of the real estate market in 2008 and 2009, millions of people experienced financial hardship including bankruptcy, foreclosures, defaults and short sales.  “How long do I have to wait after a foreclosure, bankruptcy or short sale before I can apply for a mortgage?” is a question that applies to millions of potential “boomerang” home buyers, or buyers who lost their homes during the recession who want to re-enter the housing market.  Experiencing a foreclosure, bankruptcy or short sale is challenging financially and emotionally and can have a negative impact on your credit score but more boomerang buyers should have the opportunity to buy homes again over time.

    Borrowers who have experienced a foreclosure, bankruptcy or short sale borrower are typically required to wait a certain period of time before applying for a mortgage. The waiting periods are different for conventional mortgages (mortgages that are not insured or backed by a government program) and FHA and VA mortgages.  The mortgage waiting periods after a foreclosure, bankruptcy, short sale and default are outlined in the table below.  Note how the waiting periods for FHA and VA mortgages are shorter than the waiting periods for conventional mortgages, making them a potentially more attractive option for borrowers who have experienced serious credit issues.

  • Waiting Period Following Credit Problems
      Conventional VA FHA
    Foreclosure 7 years 2 years 3 years
    Bankruptcy (Chapter7) 4 years 2 years 2 years
    Bankruptcy (Chapter13) 2 years 1 year 1 year
    Short sale 4 years 2 years 3 years
    Cured default 2 years 1 year 1 year
  • The waiting periods before you can apply for a mortgage following a foreclosure, bankruptcy, short sale or default are shorter if you have experienced an extenuating circumstance that caused your income to drop for an extended period of time.  The definition of “extenuating circumstance” varies slightly depending on the type of mortgage but generally meets the following description:

    One-time event that is beyond the borrower's control that results in a significant and extended reduction in income or a significant increase in financial obligation. Examples include a job loss or significant pay cut or serious medical illness.  According to the FHA Mortgage program, you must demonstrate that your household income declined by 20% or more for a period of at least six months.  Divorce typically qualifies as an extenuating circumstance for a conventional mortgage but not for an FHA or VA mortgage.

    The waiting periods before you can apply for a mortgage following credit issues for borrowers with extenuating circumstances are below:

  • Waiting Period Following Credit Problems for Borrowers with Extenuating Circumstance
      Conventional VA FHA
    Foreclosure 3 years 1-2 years 1 year
    Bankruptcy (Chapter7) 2 years 1-2 years 1 year
    Bankruptcy (Chapter13) 2 years 1 year 1 year
    Short sale 2 years 1 Year / None (if no late payments 12 months prior to short sale) 1 Year / None (if no late payments 12 months prior to short sale)
    Cured default 2 years 1 year 1 year
  • If you experienced an extenuating circumstance, when you apply for a mortgage you will be required to provide documentation that verifies that event as well as a written explanation of the event.  Examples of verification documentation that you may be required to provide include tax returns, W-2s, employment termination notifications, medical bills and divorce documents.

    You should also provide a written explanation of the financial hardship describing how it caused you to experience the foreclosure, bankruptcy or short sale. Your written summary should also outline that the hardship only happened once, that you have resolved all of your financial obligations related to the event and that you are back on track financially including no late or overdue payments.

    In addition to adhering to the waiting period following an adverse financial event, you must meet standard borrower mortgage qualification guidelines including credit score, employment history, income and lender underwriting requirements.

    Borrowers with a prior financial hardship applying for a conventional mortgage should ask lenders about the Fannie Mae Extenuating Circumstances Program.  Borrowers applying for an FHA mortgage should ask lenders about the FHA Back to Work Program.  If you are applying for a mortgage through the FHA Back to Work Program you must complete an approximately one hour housing counseling class before your mortgage closes.

    If you have experienced a negative credit event, we recommend that you contact multiple lenders in table below understand how the mortgage waiting periods apply to you and to understand your financing options. You may be able to qualify for a mortgage sooner than you think plus shopping lenders is the best way to find the loan that is right for you.

  • Current FHA Mortgage Rates as of December 11, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • Borrowers in Chapter 13 Bankruptcy
  • Borrowers who are in a judge-approved Chapter 13 Bankruptcy plan may be able to qualify for a mortgage before they finish the plan and their bankruptcy is officially discharged.  Applicants may be eligible for the FHA, USDA and VA government-backed mortgage programs before a Chapter 13 Bankruptcy is discharged as long as you are at least twelve months into the bankruptcy plan, you have made all of your required debt payments on-time and the bankruptcy judge provides written permission for you to enter into the mortgage. You must also qualify for the loan according to program guidelines for other qualification requirements.  Please note that you cannot qualify for a conventional mortgage (not backed by the government) until after your bankruptcy is discharged.

  • Private Money Lender Option
  • Borrowers with credit issues who cannot qualify for a mortgage with a traditional lender may want to consider a private money lender, also known as a hard money lender.  Private money lenders essentially act as the financing option of last resort and offer more flexible qualification requirements for credit-challenged borrowers.  The negative is that they charge a significantly higher mortgage rate and closing fees, so the financing is much more expensive.

    Many private money lenders do not apply waiting periods, which makes them potentially applicable to borrowers who have experienced negative credit events. If you apply for a private money loan be sure to fully understand the higher interest rate, costs and fees, including any potential pre-payment penalty, charged by the lender. Most borrower who get a private money mortgage intend to refinance the loan with a standard mortgage as soon as possible after their credit profile has improved.

    Use the FREEandCLEAR Lender Directory to search for lenders that offer mortgage programs to credit-challenged borrowers, including private money lenders.

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  • Sources

    Conventional Loan: https://www.fanniemae.com/content/guide/selling/b3/5.3/07.html

    FHA Loan: https://www.hud.gov/sites/documents/4155-1_4_SECC.PDF

    VA Home Loan: https://www.benefits.va.gov/WARMS/docs/admin26/pamphlet/pam26_7/ch04.pdf

    USDA Home Loan: https://www.rd.usda.gov/files/3555-1chapter10.pdf

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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