This article covers late payments after bankruptcy or foreclosure.
To get approve a loan after a serious event like bankruptcy or foreclosure, mortgage lenders want to see:
- You solved the problem that caused the bankruptcy or foreclosure.
- The problem is unlikely to happen again.
- You are managing your debt responsibly.
Home foreclosures and bankruptcies are not uncommon and there is no reason to be ashamed of past financial problems. You can be eligible for a new mortgage in as little as 12 months with many mainstream programs and as little as one day with portfolio or non-prime mortgages.
But what happens if you complete bankruptcy or foreclosure and then have late payments after that? Will mortgage lenders even consider you for a home loan?
Qualifying for a Home Loan After Bankruptcy
After a bankruptcy discharge, it takes time to rebuild your credit and savings back up to home-buying level. And lenders want to know your financial situation has fully recovered before they’ll approve you for a new mortgage.
As such, lenders enforce a minimum waiting period or “seasoning period” before borrowers can apply for a mortgage after bankruptcy.
The minimum waiting periods to get a mortgage after Chapter 7 are:
- FHA loan — 2 years from the discharge date with re-established credit
- VA loan — 2 years
- USDA loan — 3 years
- Conforming (Fannie Mae or Freddie Mac) loan — 4 years
Note that individual lenders can and do impose stricter guidelines. Some lenders require borrowers to wait longer — perhaps three years before applying for an FHA loan rather than the two-year minimum. Lenders call this stricter requirement an “overlay.” At Gustan Cho, we never apply overlays to program guidelines.
With extenuating circumstances (more on those below), some borrowers can get a mortgage as soon as 12 months out of bankruptcy for government-backed loans. For most prospective homebuyers, though, lenders enforce the minimums.
What about Chapter 13 bankruptcies? Both VA and FHA borrowers can qualify for home loans after paying for 12 months into a Chapter 13 bankruptcy plan (with the approval of the bankruptcy trustee). Fannie Mae and Freddie Mac require a two-year waiting period from the discharge date for a Chapter 13 plan.
Finally, so-called “non-prime” or “non-QM” loans are very lenient regarding bankruptcy or foreclosure. With 30% down, for instance, applicants are eligible for a mortgage one day out of bankruptcy.
Related: mortgage Guidelines if You Have Late Payments in the Last 12 Months
Qualifying for a Home Loan After Foreclosure
The waiting period for a new mortgage after foreclosure depends on the program you choose. For conforming mortgages, it also depends on whether the event was a foreclosure, deed-in-lieu or short sale. Finally, your waiting period may be shorter if the foreclosure was not your fault.
Conforming (Fannie Mae and Freddie Mac)
There’s a seven-year waiting period after a foreclosure with a conventional conforming loan for both Fannie Mae or Freddie Mac-backed loans.
You may be able to shorten the waiting period if you can prove that there were extenuating circumstances —meaning the foreclosure was not your fault. If approved, you might get a loan after a three-year waiting period with at least 10% down.
If your down payment is less than 20%, you’ll also need to get approved for private mortgage insurance (PMI). Mortgage insurers often impose higher standards than Fannie Mae or Freddie Mac, so your approval following a foreclosure is not a done deal even if you get an approval from your lender. If you can’t get PMI, an FHA loan might work better for you.
To qualify for a conforming loan after a deed in lieu of foreclosure or short sale, the mandatory waiting period is four years from the recorded date of deed in lieu of foreclosure or the date of a short sale.
FHA
There’s a three-year waiting period after foreclosure for FHA loans. FHA guidelines state that the borrower must have “re-established good credit since the foreclosure” before seeking a new FHA mortgage.
FHA guidelines do allow the waiting period to be shorter if there are extenuating circumstances. Those include “serious illness or death of a wage earner” or the shutdown of entire companies and widespread employee layoffs. The “inability to sell the property due to a job transfer or relocation” or divorce are not generally considered extenuating circumstances.
VA
The waiting period after foreclosure is two years for a VA loan with re-established credit.
The VA program does consider extenuating circumstances if the foreclosure was “beyond the control” of the borrower. You’ll need at least one year of good credit to be eligible for a VA mortgage.
If your foreclosed mortgage was a VA loan, you may not have any VA entitlement left. In that case, you’ll have to try another program.
Related: Can You Get a Mortgage With Good Credit but Recent Late Payments?
How Do Lenders View Late Payments After Bankruptcy or Foreclosure?
After bankruptcy or foreclosure, most lenders want to see that you have recovered from the event and that you are managing your debt responsibly. Many mortgage lenders will not accept borrowers with late payments after bankruptcy and foreclosure.
Borrowers with late payments after bankruptcy and/or housing event are considered second offenders and most lenders will want to shy away from them. Unfortunately, unexpected circumstances happen. People mean well but may encounter financial hardship after bankruptcy and foreclosure. Consumers may go in arrears on their payments.
Credit Repair for Late Payments After Bankruptcy or Foreclosure
Some lenders will approve borrowers with late payments after bankruptcy and foreclosure as long as they can get approval from an automated underwriting system (AUS). Most lenders, however, deploy “overlays” and refuse to approve a borrower with late payments after bankruptcy or foreclosure. They are allowed to approved these applicants but choose not to.
If you have late payments after a major derogatory credit event, you’ll probably need a lender that does not impose overlays.
To increase your chances for mortgage approval, write a letter explaining why you had late payments and documenting your reason if it was not your fault. If your payment was on time but reported late, attach a copy of your canceled check or bank statement to your letter.
If your late payment was caused by the loss of a job, medical issues, or other extenuating circumstances, document this with your letter of explanation. Proof might include hospital bills, a doctor’s letter, layoff notice, or disability filing.
Related: What Are Extenuating Circumstances for Home Loan Approval?
Getting Approved With Late Payments After Bankruptcy or Foreclosure
There are no guidelines expressly preventing lenders from approving your application with late payments after a bankruptcy or foreclosure. Gustan Cho Associates Mortgage Group approves borrowers with late payments after bankruptcy and foreclosure if AUS-approved. Unfortunately, most lenders will not accept any late payments after bankruptcy and/or housing event.
Homebuyers who need to get pre-approved with no mortgage overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
March 17, 2021 - 5 min read