Waiting Periods for Buying a Home After Credit Issues

Waiting periods to buy a home after a significant credit issue is one of the most common mistakes that inexperienced loan officers make. Your options are literally limited to the experience and effort of the loan officer you’re talking to.

This article will break down the basic waiting periods for different types of loans—conventional, FHA, VA, and USDA—while also explaining each credit event.

Mortgage Charge-Offs

What It Is: A mortgage charge-off occurs when a lender writes off the unpaid balance of a mortgage because the borrower has defaulted.

• Conventional Loans: 4 years (reduced to 2 years with extenuating circumstances)
• FHA, VA, and USDA Loans: No waiting period

Deed in Lieu of Foreclosure

What It Is: This is an agreement where the borrower voluntarily transfers ownership of the property to the lender to avoid foreclosure.

• Conventional Loans: 4 years (2 years with extenuating circumstances)
• FHA Loans: 3 years (1 year with extenuating circumstances)
• VA Loans: 2 years (1 year with extenuating circumstances)
• USDA Loans: 36 months (credit exception may be required)

Foreclosures

What It Is: Foreclosure is the legal process where a lender takes possession of a property due to the borrower’s failure to make mortgage payments.

• Conventional Loans: 7 years (3 years with extenuating circumstances, max loan-to-value of 90%)
• FHA Loans: 3 years (1 year with extenuating circumstances)
• VA Loans: 2 years (1 year with extenuating circumstances)
• USDA Loans: 36 months (credit exception may be required)

Chapter 7 Bankruptcy

What It Is: Chapter 7 bankruptcy involves the liquidation of assets to repay creditors and discharge remaining debts.

• Conventional Loans: 4 years from discharge (2 years with extenuating circumstances)
• FHA and VA Loans: 2 years (1 year with extenuating circumstances)
• USDA Loans: 36 months (credit exception may be required)

Chapter 13 Bankruptcy

What It Is: Chapter 13 bankruptcy allows for debt reorganization under a court-approved repayment plan.

• Conventional Loans: 2 to 4 years from dismissal date
• FHA, VA, and USDA Loans: Apply 12 months into payout period with timely payments and court’s permission

Multiple Bankruptcies

What It Is: Having more than one bankruptcy filing within a specific period.

• Conventional Loans: 5 years from discharge if more than one in the last 7 years (3 years with extenuating circumstances)
• FHA, VA, and USDA Loans: No waiting period for multiple bankruptcies

Short Sales

What It Is: A short sale occurs when a property is sold for less than the outstanding mortgage balance with the lender’s approval.

• Conventional Loans: 4 years (2 years with extenuating circumstances)
• FHA Loans: 3 years (1 year with extenuating circumstances)
• VA Loans: Generally, 12 months of satisfactory credit required
• USDA Loans: 36 months (credit exception may be required)

Federal Tax Lien with Payment Agreement

What It Is: This involves a repayment agreement with the IRS to settle unpaid federal taxes.

• Conventional Loans: Agreement plus one payment
• FHA and USDA Loans: Agreement plus three payments
• VA Loans: Agreement and timely payment

Understanding Extenuating Circumstances

Extenuating circumstances are non-recurring events that affect your income or expenses and are beyond your control. These can include:

• Divorce
• Medical issues
• Job layoff
• Death of a significant wage earner

It’s important to note that not all agencies accept all these circumstances, so always check with a professional.

Key Takeaways

• Mortgage Charge-Offs: No waiting period for government-backed loans (FHA, VA, USDA)
• Deed in Lieu of Foreclosure and Foreclosures: Vary significantly between loan types; shorter for government-backed loans
• Bankruptcies: Chapter 7 and Chapter 13 have different rules; FHA and VA often more lenient
• Short Sales and Tax Liens: Generally stricter for conventional loans; FHA, VA, USDA offer more flexibility with conditions
• Multiple Credit Events: Some waiting periods take precedence over others.  Be sure to tell your loan officer about all of the credit events that may have happened during your time of financial hardship.

Conclusion

Navigating the waiting periods after credit issues can be complex. Always consult with a mortgage professional to understand your specific situation and the best path forward for buying another home. By understanding these guidelines, you can better plan your return to homeownership and make informed decisions.