How Much Time Must You Wait after a “Derogatory Credit Event?”
“Derogatory credit events,” as Fannie Mae calls them, can significantly harm your chances at a home loan. But with a little knowledge and a bit of patience, you can get an affordable loan for the comfortable house you deserve.
Why are Past Events a Problem?
Derogatory credit events are past situations where a borrower has had trouble paying off the loan and action has had to be taken. The presence of these events on a credit report significantly increases the statistical chances of problems with debt in the future. Therefore, if a lender see things like foreclosures, bankruptcies, or charge-offs, they will be hesitant to write a loan.
This does not mean a loan is impossible. In most cases, it simply means you will have a waiting period before you are eligible for a loan backed by Fannie Mae. To determine when you will be eligible, the lender will look at the causes issue, as well as the significance of the problem.
The waiting times can range from two to seven year, but it will all depend on the type of derogatory event you’ve gone through, as well as how the issue was settled.
Fannie Mae’s Timeline Rules for “Derogatory Credit Events”
If you have had a bankruptcy in your past, a lot will depend on the type of bankruptcy you went through. For example, Chapter 7 bankruptcy is treated differently than Chapter 13 bankruptcy.
According to Fannie Mae’s rules, Chapter 7 and 11 are treated exactly the same. For both of these types, a four-year waiting period is required, which starts at the discharge or dismissal of the bankruptcy action. There are, however, some exceptions to this rule for extenuating circumstances. If extenuating circumstances can be documented, a two-year waiting period may be possible.
Chapter 13 bankruptcy is treated differently than the other two. In this case, there are different rules for bankruptcies that are discharged compared to those that are dismissed. If the Chapter 13 bankruptcy is discharged, meaning you are no longer liable for debts, the information will stay for two years. However, if your bankruptcy ends in dismissal, which can mean you still owe some or all of the money, there will be a four-year waiting period.
If you have more than one bankruptcy in your past, a five year waiting period is required. This waiting period applied to anyone with multiple bankruptcies in the past seven years, so if one of the two bankruptcies was eight or more years ago, this will not be an issue.
Because past foreclosure is a strong indicator for future default, there is a seven-year waiting period for mortgage loans supported by Fannie Mae. This waiting period starts at the date of foreclosure completion, as documented on your credit report.
Under extenuating circumstances, you may be able to get a shortened waiting period. If extenuating circumstances are documented, you could shorten the waiting period to three years. There will be special conditions for the shortened period, including modifications to the allowable loan-to-value ratio, and only the purchase of a principle residence is allowed. If the waiting period is shortened, limited-cash-out refinances are allowed for all types of occupied property, but there will be eligibility requirements.
Foreclosure and Bankruptcy
If your mortgage debt was discharged through the use of a bankruptcy, the bankruptcy waiting periods will likely be applied. This will happen if the lender has the right documents that verify that the mortgage debt was properly discharged when the bankruptcy was completed. If this does not happen, the larger appropriate waiting period must be applied.
Alternatives to Foreclosure
Deed-in-lieu of foreclosure, a pre-foreclosure sale, or the charge-off of a mortgage account can be used as an alternative to foreclosures.
A deed-in-lieu of foreclosure is a transaction where the deed of the property is transferred to the the servicer. Essentially, the borrower simply gives the deed back to the lender in order to avoid the foreclosure process. These transactions are identified on a credit report.
A pre-foreclosure sale, often referred to as a “short sale,” is when a property, which is in the initial phases of foreclosure or loan default, is sold at a lower price. To make it work, the bank usually has to agree to accept a payoff of an amount less than the borrower owes. The bank may agree to this, as they can get something back without having to deal with a foreclosure process.
If there is little or no chance that the borrower will be able to repay the mortgage loan, the lender may do a charge-off. Basically they write the loan off as bad debt. This doesn’t automatically make you free-and-clear of the financial obligations, so talk with an attorney for more details if a charge-off is occurring. A charge-off will be reported on a credit report when an account reaches delinquency status.
For all of the above alternatives, you will have a four-year waiting period after completion.
Once again, there is the chance to use extenuating circumstances to your advantage. If you can show extenuating circumstances, you may be able to reduce the waiting period to two years.
How to Reestablish Good Credit
If you have gone through any of the derogatory credit events in the past, and you hope to borrow money for a home loan in the future, you will eventually want to reestablish your credit. To do this, you will need to meet a few special conditions.
First of all, the waiting period, which depends on the circumstances, will need to be completed. Once enough time has gone by, the loan you use will need to have a recommendation that it is acceptable for delivery to Fannie Mae. If the loan is manually underwritten, it will need to meet minimum credit scores based on conditions of the loan and eligibility requirements.
Helping Find the Right Loan for You
Whether you have experienced a derogatory credit event or have a spotless credit history, we will be proud to walk with you through the complexities of home mortgage loans.
Contact us today and we’ll use our common-sense approach to mortgage approval to increase your chances of an affordable home loan on a top-quality house!