The Great Recession was hard for many consumers. People who had perfect credit experienced extreme credit issues for the first time in their lives. Overcoming the circumstances that caused the previous financial issues requires knowing what to expect when reapplying for a mortgage in the future. It is important to understand the process and be informed about details of the mortgage guidelines to become a homeowner again.
How long do I have to wait before I can get a mortgage?
All standard wait periods could be less under certain extenuating circumstances such as death of co-borrower, medical circumstances, job loss and possibly divorce.
Extenuating Circumstances – nonrecurring events that are beyond the applicant’s control. Resulting in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
Any life changing event should be pointed out in order to see if the wait period would be less.
The chart below shows standard wait periods for traditional mortgages:
- Fannie Mae conventional mortgage after foreclosure, short sale, Chapter 7 bankruptcy and Chapter 13 bankruptcy
- FHA mortgage after foreclosure, short sale, Chapter 7 bankruptcy and Chapter 13 bankruptcy
- VA mortgage after foreclosure, short sale, Chapter 7 bankruptcy and Chapter 13 bankruptcy
- USDA Rural Housing mortgage after foreclosure, short sale, Chapter 7 bankruptcy and Chapter 13 bankruptcy
There are programs offering a mortgage one day after the major derogatory event with a large down payment and ability to qualify.
Coming out of a major financial setback can feel like an uphill climb, but it is not insurmountable. In fact, there will be a point in time when nothing from that time of financial difficulty will even appear on the credit report. For most issues it will expire off the credit report under federal law within 7 years. The worst case scenario is ten years when it comes to a Chapter 7 bankruptcy. Late payments, collections, charge-offs (debt written off and sent to collection), foreclosure, defaults, chapter 13 bankruptcy, etc. will all come off the credit report after seven years. Chapter 7 bankruptcy falls off the credit report after ten years.
It is critical after a serious derogatory credit event to be PERFECT moving forward. Aim for perfection. If there is a late payment or collection a good explanation such as a medical event or job loss will generally suffice.
When there has been derogatory credit in the past, it will likely have to be explained in a written letter. Lenders must document their analysis as to whether the late payments were based on a:
- Disregard for financial obligations
- An inability to manage debt
- Factors beyond the control of the borrower (extenuating circumstances).
The underwriter is looking for:
- WHY the derogatory event occurred
- WHY it was out of your control
- WHY it is unlikely to happen again
Consumers get a second chance, but even one late payment or one collection after bankruptcy, foreclosure or short sale will cause a closer look by the underwriter. You don’t want the bad credit to look like a pattern of disregard. At the end of the day the mortgage approval is designed to determine the likelihood a borrower will repay the debt.
It never hurts to ask your lender what they think about your circumstances. You never know how they will view the big picture. Certain situations can result in less of a wait period than the standard requirements. Don’t be shy, just ask a mortgage professional for their opinion.
About the Author: Patrick Ritchie loves teaching about credit; he is the author of The Credit Road Trip and The Credit Road Map series of books. Check out his free online classes at www.CreditLiteracyProject.com.
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