Conventional Derogatory Credit Rules: Bankruptcies & Foreclosures

Because Conventional loans are heavily reliant on credit scores and historically lower default risks, the agencies are highly punitive when it comes to prior mortgage defaults. If you lost a home, the Conventional waiting periods are significantly longer than FHA or VA.

The 7-Year Foreclosure Penalty

If you suffered a foreclosure, you must wait seven (7) years from the date the foreclosure was completed (the date the title formally transferred). During this time, you must re-establish a pristine credit history. If your credit report still shows late payments after the foreclosure, you will likely be denied even after the 7 years have passed.

Short Sales & Deed-in-Lieu (The 4-Year Rule)

A Short Sale (pre-foreclosure sale) or a Deed-in-Lieu of foreclosure is viewed slightly more favorably than a full foreclosure, but it still carries a heavy penalty. Fannie Mae and Freddie Mac require a four (4) year waiting period from the completion date.

Important Exception: What if you had a foreclosure, but the debt was completely wiped out in a bankruptcy? Fannie Mae guidelines state that if a mortgage debt was discharged through a bankruptcy, the bankruptcy waiting periods may be applied instead of the foreclosure waiting periods.

Unlike FHA and VA loans, which often allow you to buy a home just 2 years after a bankruptcy, Conventional loans require more time to prove financial stability.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy requires a four (4) year waiting period from the date of discharge or dismissal.

Chapter 13 Bankruptcy

Because a Chapter 13 bankruptcy requires you to actively repay a portion of your debts, the agencies view it favorably. You only have to wait two (2) years from the discharge date. However, if your Chapter 13 was dismissed (meaning you failed to complete the repayment plan), the penalty jumps to four (4) years from the dismissal date.

Multiple Bankruptcies

If you have filed for bankruptcy more than once within the past seven years, Fannie Mae and Freddie Mac require a strict five (5) year waiting period from the most recent discharge or dismissal date.

If your derogatory credit event was caused by a massive, unavoidable life event, Fannie Mae allows the underwriter to reduce your waiting period. This is known as an "Extenuating Circumstance."

What Qualifies as an Extenuating Circumstance?

It must be a nonrecurring event that is beyond the borrower's control that results in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

• Examples that DO qualify: Severe medical emergencies, sudden death of a primary wage earner, or a massive uninsured property casualty.
• Examples that DO NOT qualify: Divorce, inability to sell a home after a job transfer, or an adjustable-rate mortgage resetting to a higher payment.

How the Timeline is Reduced

If you can definitively document the extenuating circumstance, the waiting periods are reduced significantly:

• Foreclosure: Drops from 7 years down to 3 years.
• Short Sale / Deed-in-Lieu: Drops from 4 years down to 2 years.
• Chapter 7 Bankruptcy: Drops from 4 years down to 2 years.