MortgageLoans.net

Buying a Home After a Major Credit Event

Borrowers who have experienced bankruptcy, foreclosure, short sale, or deed-in-lieu of foreclosure can qualify for a new mortgage after completing a program-specific waiting period and re-establishing credit. Waiting periods range from 1-7 years depending on the event type, the loan program, and whether extenuating circumstances apply. During the waiting period, borrowers must rebuild credit and maintain clean payment histories to qualify when the period expires.

Key Takeaways

  • Every major loan program has specific waiting periods after bankruptcy, foreclosure, short sale, and deed-in-lieu — no credit event results in permanent disqualification.
  • Chapter 7 bankruptcy waiting periods range from 2 years (FHA/VA) to 4 years (conventional), measured from the discharge date.
  • Foreclosure carries the longest standard waiting periods, with conventional loans requiring 7 years and FHA/VA requiring 2-3 years.
  • Extenuating circumstances (serious illness, job loss due to company closure, death of wage earner) can reduce conventional waiting periods by approximately half.
  • Divorce alone is generally not considered an extenuating circumstance for waiting period reductions.
  • Re-establishing credit during the waiting period is mandatory — the time requirement alone is not sufficient for qualification.
  • Manual underwriting through FHA and VA may provide additional flexibility for borrowers with credit events who have strong compensating factors.
  • The waiting period clock starts from the event completion date (discharge, sale, transfer), not the date of the first missed payment.

How It Works

Bankruptcy Waiting Periods

Chapter 7 bankruptcy, which involves liquidation of assets and discharge of debts, carries the following waiting periods from the discharge date: conventional loans through Fannie Mae require 4 years, FHA requires 2 years, VA requires 2 years, and USDA requires 3 years .

Chapter 13 bankruptcy, which involves a court-supervised repayment plan, has shorter waiting periods because the borrower is repaying a portion of the debt. Conventional loans require 2 years from the discharge date or 4 years from the dismissal date. FHA may allow qualification after 1 year of the repayment plan with court approval and a history of on-time plan payments. VA requires 1 year of plan payments with court approval. USDA requires 1 year of plan payments .

Foreclosure Waiting Periods

After a completed foreclosure (the property has been sold or taken back by the lender), conventional loans require a 7-year waiting period from the completion date. FHA requires 3 years. VA requires 2 years. USDA requires 3 years. These are among the longest waiting periods in the mortgage underwriting framework and reflect the severity with which the industry views a completed foreclosure .

Short Sale Waiting Periods

A short sale occurs when the lender agrees to accept less than the full balance owed and release the lien. Conventional loans require a 4-year waiting period (or 2 years with a 20% down payment and extenuating circumstances). FHA requires 3 years. VA has no specific short sale waiting period separate from its general credit guidelines. USDA generally requires 3 years .

Deed-in-Lieu of Foreclosure

A deed-in-lieu occurs when the borrower voluntarily transfers property ownership to the lender to avoid foreclosure. Conventional loans require a 4-year waiting period (or 2 years with extenuating circumstances). FHA requires 3 years. VA requires 2 years. USDA requires 3 years .

Extenuating Circumstances Exceptions

Most loan programs provide reduced waiting periods when the credit event resulted from extenuating circumstances beyond the borrower’s control. Qualifying extenuating circumstances typically include serious illness or injury, death of a wage-earning family member, job loss due to company closure, or natural disaster. Divorce alone is generally not considered an extenuating circumstance unless accompanied by another qualifying factor. The borrower must provide documentation of the event and demonstrate that the credit event was directly caused by the extenuating circumstance .

With documented extenuating circumstances, conventional loan waiting periods are typically reduced by approximately half: foreclosure drops from 7 years to 3 years, short sale from 4 years to 2 years, and deed-in-lieu from 4 years to 2 years. FHA and VA may also offer reduced waiting periods for extenuating circumstances.

Credit Re-Establishment Requirements

Meeting the waiting period alone is not sufficient. Borrowers must also demonstrate that they have re-established credit since the event. This means maintaining clean payment histories on all credit accounts, re-establishing at least three active trade lines with 12+ months of history, and achieving the minimum credit score required by the loan program. A pattern of delinquencies or new collections during or after the waiting period can result in denial even if the time requirement is met.

Manual Underwriting Options

FHA and VA loans offer manual underwriting as an alternative to automated underwriting for borrowers who may not receive an automated approval. Manual underwriting applies more flexible guidelines but requires the underwriter to individually evaluate every aspect of the file, including the credit event, recovery pattern, income stability, reserves, and overall borrower profile. Compensating factors such as significant reserves, low DTI, long employment tenure, and residual income play a larger role in manual underwriting decisions .

Related topics include divorce and mortgage qualification, recent job change, relocation, and employment gaps, buying a home with significant student debt, and special borrower situations: a decision guide.

Key Factors

Factors relevant to Buying a Home After a Major Credit Event
Factor Description Typical Range
Type of Credit Event
Loan Program
Extenuating Circumstances
Credit Re-Establishment Quality

Examples

Scenario: Borrower applying for FHA loan 2.5 years after Chapter 7 bankruptcy discharge
Outcome: The FHA 2-year waiting period has been met. The borrower has re-established three trade lines with perfect payment since discharge. The 640 score meets FHA minimums for the 3.5% down payment tier. The application proceeds through standard FHA underwriting and is approved.

Scenario: Borrower applying for conventional loan 5 years after foreclosure with extenuating circumstances
Outcome: The standard conventional waiting period is 7 years, but with documented extenuating circumstances (serious illness), the period is reduced to 3 years. The borrower has exceeded the 3-year reduced period, re-established credit with a 700 score, and qualifies for a conventional loan with a 10% down payment.

Scenario: Borrower applying for VA loan 18 months after Chapter 13 plan completion
Outcome: The VA 2-year waiting period from Chapter 13 discharge has not yet been met (only 18 months). However, VA allows qualification after 1 year of Chapter 13 plan payments with court approval. Since the plan was completed (all payments made), the borrower may qualify if the underwriter determines the file meets VA manual underwriting standards.

Common Mistakes to Avoid

  • Assuming the waiting period starts from the first missed payment rather than the event completion date
  • Not re-establishing credit during the waiting period
  • Claiming extenuating circumstances for divorce alone
  • Taking on new derogatory credit items during the waiting period
  • Not checking public records for accuracy of event dates
  • Applying for the wrong loan program based on waiting period timing

Documents You May Need

  • Bankruptcy discharge papers (Chapter 7) or completion/dismissal documentation (Chapter 13)
  • Foreclosure completion documentation (trustee's deed, sheriff's deed, or credit report notation)
  • Short sale settlement statement or HUD-1/Closing Disclosure from the short sale transaction
  • Deed-in-lieu agreement and recorded deed transfer documentation
  • Letter of explanation detailing the circumstances surrounding the credit event
  • Extenuating circumstances documentation (medical records, employer layoff notice, death certificate, disaster declaration)
  • Credit report showing current scores and post-event payment history
  • Documentation of re-established credit accounts (statements showing 12+ months of on-time payments)
  • Court approval letter (for Chapter 13 borrowers applying during or shortly after the repayment plan)

Frequently Asked Questions

How long after bankruptcy can I get a mortgage?
For Chapter 7: FHA and VA require 2 years from discharge, USDA requires 3 years, and conventional requires 4 years. For Chapter 13: FHA may allow qualification after 1 year of plan payments with court approval. VA and USDA require 1 year of payments. Conventional requires 2 years from discharge or 4 years from dismissal.
Can I get a mortgage after foreclosure?
Yes. The waiting period after foreclosure is 7 years for conventional loans (3 years with extenuating circumstances), 3 years for FHA, 2 years for VA, and 3 years for USDA. After the waiting period, you must meet all standard program requirements.
What counts as extenuating circumstances?
Qualifying extenuating circumstances typically include serious illness or injury, death of a wage-earning family member, job loss due to company closure or downsizing, and natural disaster. Divorce alone is generally not considered extenuating. The borrower must provide documentation showing direct causation.
Does a short sale have the same waiting period as a foreclosure?
No. Short sales generally have shorter waiting periods than foreclosures. Conventional loans require 4 years after a short sale versus 7 years after a foreclosure. FHA requires 3 years for both. VA has no specific short sale waiting period separate from general credit guidelines.
How do I re-establish credit after a major credit event?
Open at least two to three new credit accounts (secured credit cards, credit builder loans, or small installment loans) as soon as possible after the event. Make all payments on time for at least 12 months. Avoid high utilization and any new derogatory items. The goal is to establish a pattern of responsible credit use.
Can I get a mortgage during an active Chapter 13 repayment plan?
FHA and VA may allow qualification after 12 months of on-time Chapter 13 plan payments with written court approval. Conventional loans generally require the plan to be fully completed and discharged before qualification.
What if my foreclosure and bankruptcy happened at the same time?
When multiple events occur simultaneously (which is common when a borrower includes the mortgage in a bankruptcy filing), the longer of the two waiting periods applies. For conventional loans, the 7-year foreclosure waiting period would control since it exceeds the 4-year Chapter 7 period.
Is manual underwriting available for borrowers with past credit events?
FHA and VA offer manual underwriting when the automated system does not approve the file. Manual underwriting evaluates the complete borrower profile individually and places significant weight on compensating factors such as reserves, low DTI, stable employment, and the pattern of credit recovery since the event.
Last updated: Reviewed by:

Related Topics