What is the Fannie Mae Bankruptcy Waiting Period?

Navigating the world of home loans can be challenging, especially if you’ve been through a bankruptcy. Understanding the waiting periods associated with different types of bankruptcies is necessary for planning your path to homeownership or a path to refinancing your current mortgage.

So, what exactly is the Fannie Mae bankruptcy waiting period?

The Fannie Mae bankruptcy waiting period is the amount of time that must pass after a bankruptcy is discharged or dismissed before you can qualify for a new mortgage loan subject to Fannie Mae guidelines.  This period ensures that borrowers have enough time to rebuild their credit and demonstrate financial stability before taking on a new mortgage.

As an aside, Fannie Mae and Freddie Mac are the “Government Sponsored Enterprises” that effectively back over 90% of all mortgages taken out in the United States. The loans that these entities back are known as “conforming loans” or sometimes more broadly as “conventional loans” to contrast them against loans that are sponsored by the government itself, such as FHA and VA loans.

Fannie Mae’s guidelines are similar to Freddie Mac’s, so everything discussed below applies to Freddie Mac as well.

NOTE: If you need a mortgage sooner than what Fannie Mae might allow, there are other options you can explore with more flexible guidelines such as FHA financing which is discussed here.

How Long is the Bankruptcy Waiting Period for Fannie Mae?

The length of the waiting period varies depending on the type of bankruptcy. Let’s break it down:

Chapter 7 Bankruptcy

For a Chapter 7 bankruptcy, the standard waiting period is four years from the discharge or dismissal date. This allows sufficient time for individuals to re-establish their credit history and financial footing. However, in cases of documented extenuating circumstances, this waiting period can be reduced to two years.

Chapter 13 Bankruptcy

The waiting period for Chapter 13 bankruptcy is slightly different. If the Chapter 13 bankruptcy was discharged, the waiting period is two years from the discharge date. If it was dismissed, the waiting period is four years from the dismissal date. Similar to Chapter 7, extenuating circumstances can reduce the waiting period to two years after dismissal.

Multiple Bankruptcy Filings

If you have more than one bankruptcy filing within the past seven years, the waiting period extends to five years from the most recent discharge or dismissal date. Documented extenuating circumstances can reduce this to three years.

What Are Extenuating Circumstances?

Extenuating circumstances are non-recurring events that are beyond the borrower’s control, resulting in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. Examples include serious illness or death of a wage earner in the family.

To qualify for a shorter waiting period due to extenuating circumstances, you must provide documentation that clearly illustrates the event’s impact on your finances and demonstrate that your financial situation has stabilized. A lender who has experience with bankruptcies will be able to help you with your explanation and documentation.

How Does Fannie Mae Verify Bankruptcy Events?

Fannie Mae requires lenders to thoroughly review your credit report and loan application to identify any significant derogatory credit events. They check the public records section and all tradelines, including mortgage accounts, to identify any previous foreclosures, deeds-in-lieu, preforeclosure sales, charge-offs of mortgage accounts, and bankruptcies. If these events are not clearly identified in the credit report, lenders must obtain appropriate documentation to establish the completion date of these events.

What is the Difference Between Discharge and Dismissal Dates?

Understanding the distinction between discharge and dismissal dates in bankruptcy proceedings is essential because these dates directly impact your eligibility and waiting period for a new mortgage. Let’s delve deeper into what each term means and why they matter.

Discharge Date

The discharge date is a significant milestone in the bankruptcy process. This is the date when the bankruptcy court officially releases you from the obligation to repay certain debts included in the bankruptcy filing. Essentially, the discharge wipes out your legal liability for these debts, providing you with a fresh financial start.

Why is the Discharge Date Important?

1. Restarting Your Financial Life: The discharge date marks the end of the repayment obligations, allowing you to begin rebuilding your credit and financial health without the burden of past debts.
2. Impact on Credit Report: This data is recorded on your credit report, signaling to future lenders that you have been relieved of your debt obligations through bankruptcy.
3. Eligibility for New Credit: Once your debts are discharged, you may start to qualify for new credit accounts, although typically with stricter terms and higher interest rates initially.
4. Waiting Period Calculation: For home loans, particularly those backed by Fannie Mae and Freddie Mac, the waiting period is calculated from the discharge date. This period varies depending on the type of bankruptcy and specific circumstances but generally starts from this date.

Dismissal Date

The dismissal date, on the other hand, represents a less favorable outcome in the bankruptcy process. A case dismissal occurs when the bankruptcy court decides to terminate your case without granting a discharge of your debts. This can happen for several reasons, such as failure to comply with court requirements, not completing required documentation, or missing scheduled payments.

Why is the Dismissal Date Important?

1. No Debt Relief: Unlike a discharge, a dismissal means you are still legally obligated to repay all the debts that were part of the bankruptcy filing. The financial burden remains.
2. Negative Impact on Credit Report: A dismissal is recorded on your credit report and indicates to lenders that you attempted bankruptcy but did not complete it successfully. This can severely impact your creditworthiness.
3. Longer Waiting Periods: For mortgage eligibility, the waiting period after a dismissal is typically longer than after a discharge. This reflects the increased risk perceived by lenders due to the lack of resolution in your financial difficulties.
4. Potential for Re-filing: In some cases, you might be able to re-file for bankruptcy after a dismissal, but this depends on the reasons for the dismissal and your ability to correct the issues that led to it.

What About Freddie Mac Bankruptcy Waiting Periods?

Similar to Fannie Mae, Freddie Mac also has specific waiting periods for bankruptcies. For Chapter 7, the waiting period is also four years, with possible reductions for extenuating circumstances. Chapter 13 has a two-year waiting period from the discharge date and four years from the dismissal date. It’s important to check the specific requirements of each agency, as they can influence your eligibility for different loan programs.

How Can I Improve My Chances of Getting a Mortgage After Bankruptcy?

Rebuilding your credit score is key to improving your chances of qualifying for a mortgage after bankruptcy. Here are some tips:

• Pay Your Bills on Time: Consistent, on-time payments are crucial for improving your credit score.
• Reduce Debt: Lowering your credit card balances and other debts can positively impact your credit score.
• Check Your Credit Report: Regularly review your credit report for any inaccuracies and dispute any errors you find.
• Avoid New Debt: Refrain from taking on new debt, as it can negatively impact your credit score and debt-to-income ratio.

What Are the Minimum Credit Score Requirements?

For a conventional loan, Fannie Mae typically requires a minimum credit score of 620. However, higher credit scores can help you secure better interest rates and loan terms. It’s advisable to aim for a score higher than the minimum requirement to increase your chances of approval and to get more favorable loan conditions.

Can I Buy a Home Sooner with a “Manual Underwrite?”

In some cases, a “manual underwrite” (as opposed to an automated or computer-generated underwrite) may be an option. This process involves a more detailed review of your financial situation by the lender, potentially allowing for exceptions to standard waiting period requirements. However, this is less common and typically requires strong compensating factors, such as a significant down payment or a strong history of on-time payments since the bankruptcy.

How Do Interest Rates Affect My Mortgage After Bankruptcy?

Interest rates play a significant role in determining your monthly mortgage payments and the overall cost of your loan. After bankruptcy, you may face higher interest rates initially due to the increased risk perceived by lenders. However, as you rebuild your credit and demonstrate financial stability, you may qualify for better rates in the future.

Frequently Asked Questions

Can I get a mortgage before the waiting period is over?

Generally, you must wait until the waiting period is over before qualifying for a new mortgage. However, extenuating circumstances can sometimes shorten this period.

How does a bankruptcy affect my ability to refinance my mortgage?

Similar waiting periods apply to refinancing your mortgage after bankruptcy. It’s essential to meet these requirements and rebuild your credit to qualify for better refinancing terms.

What if I want to obtain a mortgage before Fannie Mae’s waiting periods run?

Fortunately, there are other mortgage financing options such as FHA and Non-QM (non-qualified mortgages) with more flexible guidelines. A lender that has experience working with borrowers with bankruptcies will be able to find the best mortgage financing option for your particular situation.

What documentation do I need to provide to prove extenuating circumstances?

Documentation can include medical records, job loss notices, death certificates, or any other paperwork that demonstrates the significant impact on your finances.

Can I qualify for an FHA loan after bankruptcy?

Yes, FHA loans have different waiting period requirements, often shorter than conventional loans, making them a viable option for some borrowers.

Can I ever get a mortgage while I am IN a bankruptcy?

Yes, but you can only obtain an FHA mortgage while you are in a bankruptcy. Fannie Mae requires both discharges and waiting periods.

How long does it take to rebuild my credit after bankruptcy?

Rebuilding credit can take time, often several years. Consistent on-time payments, reducing debt, and avoiding new credit can expedite the process.

Conclusion

At JVM Lending, we are experts when it comes to helping borrowers with bankruptcies obtain mortgage financing. Our team is dedicated to helping you understand your options and find the best loan program tailored to your unique situation. We offer personalized guidance and support, and we are happy to answer all of your questions in regard to waiting periods, rebuilding your credit, and taking the necessary steps to either refinance your existing mortgage or obtain a new mortgage to purchase a home.

Whether you’re dealing with a Chapter 7 or a Chapter 13 bankruptcy, we can help you understand the specific requirements and pivot you to the type of mortgage that will best meet your needs.  Our goal is to provide you with the resources and information you need to confidently move forward on your path to buying a home or refinancing your current mortgage.

Ready to get started? Contact JVM Lending today to learn more about your options and take the first step toward securing your loan.