Getting a Mortgage After Bankruptcy or Foreclosure in California

FHA measures every count to the date the FHA case number is assigned, not to the application or the closing. After a Chapter 7 bankruptcy the waiting period is counted from the discharge date, and over the stretch since the discharge the borrower must have either re-established good credit or chosen not to take on new credit. HUD allows a shorter period when the bankruptcy was caused by extenuating circumstances beyond the borrower's control and the borrower has since shown, with documents, an ability to manage money responsibly.

A Chapter 13 plan does not have to be finished first. HUD publishes a minimum portion of the payout period that must have elapsed, requires that the payments over the most recent stretch of the plan were made on time, and requires the bankruptcy court's written permission to enter into the mortgage.

After a foreclosure or a deed-in-lieu, the waiting period is counted from the date of the deed-in-lieu or the date the borrower transferred ownership to the foreclosing entity. HUD allows an exception for documented extenuating circumstances beyond the borrower's control, its own examples being a serious illness or the death of a wage earner, when good credit has been re-established since. Two things HUD says do not count: divorce is not an extenuating circumstance, with one narrow carve-out for a mortgage that was current at the divorce, went to the former spouse and was foreclosed later; and being unable to sell the home because of a job transfer or a move does not qualify. A separate FHA program for borrowers who had lost income in an economic event, which HUD ran for a few years, has ended and is not in the current handbook; the ordinary exception is what remains.

After a short sale, which HUD calls a pre-foreclosure sale, the waiting period is counted from the date title transferred. There are two exceptions: a borrower whose mortgage payments and installment debt were paid within the month due for the stretch before the sale, and documented extenuating circumstances as for a foreclosure.

A file inside any of these periods is not approved by FHA's automated scorecard; it is downgraded to manual underwriting, where an underwriter reads the exceptions. The lender documents the discharge or the transfer of title when the credit report does not show it, and after a bankruptcy also documents that the borrower's situation now indicates the events behind it are not likely to recur. Re-established credit, under HUD's manual rules, is read from the overall pattern of credit behavior rather than from isolated late payments, with housing payments weighed first, then installment debt, then revolving accounts.

Fannie Mae calls a bankruptcy, a foreclosure, a deed-in-lieu, a preforeclosure or short sale and a mortgage charge-off significant derogatory credit events, and says in its guide that they dramatically increase the likelihood of a future default. For each one the lender must determine the cause and significance, confirm that the published waiting period has passed, and confirm that acceptable credit has been re-established.

The waiting period begins on the completion, discharge or dismissal date of the event, whichever applies, and for a manually underwritten loan ends on the day the new loan is disbursed. Each event has a standard period and a shorter one for documented extenuating circumstances. A Chapter 13 is measured differently from a Chapter 7, with one period from its discharge and another from its dismissal; more than one bankruptcy filing within a recent span carries a longer period; a foreclosure carries the longest standard period, and its shorter extenuating-circumstances period comes with limits on occupancy, loan purpose and loan-to-value. A deed-in-lieu, a short sale and a mortgage charge-off share one period.

Fannie Mae defines extenuating circumstances in its guide: nonrecurring events beyond the borrower's control that result in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations. The lender has to substantiate the claim with documents confirming the event (a divorce decree, medical reports or bills, a layoff notice, severance papers), documents showing what prevented the borrower from resolving it, and a written explanation from the borrower confirming the nature of the event and showing there was no reasonable option other than to default.

Credit counts as re-established under Fannie Mae's guide only when all of the following are met: the waiting period and its related requirements, an acceptable recommendation from its automated underwriting system (or, for a manually underwritten loan, its minimum credit score for the loan), and a traditional credit history. Nontraditional credit and a thin file are not accepted. Freddie Mac publishes rules of its own in its own guide; this page describes Fannie Mae's.

VA's underwriting regulation says a discharge in a straight liquidation bankruptcy, which is a Chapter 7, would not in itself disqualify the loan, and that a prior foreclosure will not in itself disqualify the borrower; in each case the lender must develop the facts and circumstances. VA publishes a waiting period counted from the Chapter 7 discharge, with a shorter path when the borrower has obtained new credit since and paid it as agreed and the bankruptcy was caused by circumstances beyond the borrower's control. VA uses that phrase rather than extenuating circumstances, and says divorce is not generally viewed as beyond the control of the borrower or spouse. A very recent discharge generally cannot be found a satisfactory credit risk.

A borrower still in a Chapter 13 plan may receive favorable consideration after a published minimum stretch of satisfactory plan payments, if the trustee or the bankruptcy judge approves the new credit; a completed plan with satisfactory payments is treated as re-established credit. In cases not involving bankruptcy, VA treats credit as generally re-established after a published stretch of satisfactory payments following the last derogatory item.

For a foreclosure, VA's credit underwriting presentation from its lender conference states a waiting period, shorter with documented re-established credit where the foreclosure was outside the borrower's control, and says that when the home was included in a Chapter 7 the later of the discharge and the foreclosure sale date starts the count. The same presentation says VA sets no waiting period after a short sale or a deed-in-lieu and that any late mortgage payments are read as part of the credit review; that statement rests on the presentation, since the handbook chapter it cites was not read for this page. VA itself sets no minimum credit score and does not treat a lack of credit history as a negative; the lender sets its own credit standards for the loans it will fund.