Buying a home after bankruptcy: waiting periods and next steps

Fannie Mae's waiting periods

Fannie Mae's Selling Guide treats bankruptcy as a "significant derogatory credit event." The lender must find out what caused it, confirm enough time has passed, and confirm you have re-established acceptable credit. The standard waits are:

The waiting period starts on the completion, discharge or dismissal date. For manually underwritten loans it ends on the date the new loan is disbursed, so you need the full period to have passed by closing, not just by application.

The shorter Chapter 13 discharge wait reflects the fact that you have already spent years making plan payments. Fannie Mae notes that a borrower who could not finish the plan and received a dismissal is held to four years instead.

Passing the wait is not the whole test. Fannie Mae also requires traditional credit; it says nontraditional credit or "thin files" are not acceptable for re-establishing credit after these events. That means real accounts on your credit report with a record of on-time payments.

FHA's waiting periods

HUD Handbook 4000.1 sets FHA's rules, and they are shorter:

• Chapter 7: at least two years must have passed since the discharge date when the FHA case number is assigned. During those two years you must have re-established good credit or chosen not to take on new credit. A period of 12 to 24 months may be acceptable if you can show the bankruptcy was caused by extenuating circumstances beyond your control and you have since managed your finances responsibly.
• Chapter 13: a bankruptcy still in progress does not disqualify you if at least 12 months of the payout period have passed, every required payment in the most recent 12 months was on time, and the bankruptcy court has given written permission for the mortgage.

Note the different end point: FHA measures to the case number assignment date, which happens early in the process, while Fannie Mae measures to disbursement.

What counts as extenuating circumstances

Fannie Mae defines extenuating circumstances as nonrecurring events beyond your control that cause a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations. The lender must substantiate the claim. Fannie Mae's examples of supporting documents include a divorce decree, medical reports or bills, a layoff notice or severance papers, plus records showing why you could not solve the problem, such as insurance claim settlements, listing agreements or tax returns from before, during and after a job loss.

You also need a written explanation. Fannie Mae says it must confirm the event that led to the bankruptcy and show you had no reasonable option other than to default. A letter or email from you can serve. Keep it short and factual, link each document to the event, and describe what has changed since. The lender makes the final call.

Using the waiting time well

The wait is the time to build the record lenders will judge you on.

1. Check your reports. Get free reports from AnnualCreditReport.com. Each debt included in the bankruptcy should show as discharged or included in bankruptcy with a zero balance. Dispute any that still show money owed.
2. Rebuild with a few accounts. A secured card or small installment loan paid on time every month gives lenders the traditional credit Fannie Mae requires. More accounts are not better; perfect payment history is.
3. Avoid new late payments. A late payment after bankruptcy is far more damaging than one before it, because lenders look for evidence that the problem is behind you.
4. Save. A larger down payment and cash reserves strengthen an application that has a bankruptcy in its history.
5. Keep your paperwork. Lenders often ask for the discharge order and the list of debts included in the case.

Talking to lenders

When you are close to the end of a waiting period, talk to more than one lender. Lenders can add stricter rules on top of Fannie Mae and FHA minimums, so one lender's "not yet" is not the final word. The CFPB notes that multiple mortgage credit checks within a short shopping window generally count as a single inquiry for scoring purposes, so comparing lenders does not have to hurt your score.

Be upfront about the bankruptcy. It will appear on your credit report and the loan application asks about it directly.

The bottom line

Find your discharge or dismissal date and count from it. Fannie Mae's standard wait after Chapter 7 is four years; FHA's is two, and FHA can allow a purchase during Chapter 13 with court permission. Use the waiting period to rebuild a clean, traditional credit record and to save, so that when the date arrives you meet both the clock and the lender's credit review.