Update on Getting A Mortgage After Bankruptcy or Foreclosure

As with most things these days, the rules seem to change as our real estate market struggles to improve.  It used to be that if you suffered a bankruptcy or foreclosure you could kiss home ownership goodbye for at least 7 years, now for the most part, the rules say that you must wait at least 3 years, depending upon the reason you lost your house.

If you lost your house do to "extenuating circumstances" over which you had no control; this includes "life-changing" events such as a job loss, serious illness, or the death of a wage earner.  A divorce, a business failure or being overwhelmed by too much credit does not count.  You won't just automatically qualify, but you must provide documentation that you can handle credit and afford the payments.  You need a squeaky clean credit history after your life changing event. 

Unfortunately, after the loss of a home, many people cut up the credit cards and live on cash.  That won't cut it, you must show a good payment history to obtain a mortgage.  Although you can develop an alternative credit report using your rent payments, utility bills, and cellphone payments, most lenders still want to see trade lines and a credit score.

The other factor that comes into play is if you seek a mortgage with a government-backed financing, the wait time is usually less.  For instance, mortgages insured by the Department of Veterans Affairs, after a Chapter 13 bankruptcy, the minimum wait time for VA financing is just 12 months; a Chapter 7 bankruptcy the wait is usually about 24 months.

FHA has essentially the same rules as the VA regarding bankruptcies - one year for Chapter 13 and two years for Chapter 7.  If you went through a short sale or foreclosure it is usually three years...again if there are documentable extenuating circumstances the waits can be shorter. 

For conventional loans, the wait times are tiered, 2 years after a short sale if there are extenuating circumstances, 4 years without.  Freddie Mac guidelines say that when a borrower's financial issues were due to his mismanagment: An acceptable credit reputation must be reestablished for at least 84 months if he or she was foreclosed upon, 60 months if the borrower filed more than one bankruptcy petition in the last seven years, 48 months after the discharge or dismissal of a Chapter 7 bankruptcy, and 48 months after conveyance of a deed in lieu of foreclosure or a short payoff.

The wait is 48 months for all other significant adverse or derogatory credit information, but only 24 months from the discharge date of a Chapter 13 bankruptcy.  If extenuating circumstances can be shown, and if there is evidence on the credit report that the borrower has reestablished an acceptable credit reputation, the wait is 36 months if you went through a foreclosure of filed more than one bankruptcy petition in the last seven years.  If the bankruptcy was discharged or dismissed, the wait is only 24 months.  As well as for a short sale, deed-in-lieu, or if the borrower suffered another significant adverse or derogatory credit event.

So don't despair, there is light on the horizon.