Mortgage Extenuating Circumstance: How It Shortens Your Waiting Period

It can be challenging to get a mortgage if you have significant derogatory marks such as a foreclosure or bankruptcy on your credit report. Conventional and government-backed lenders sometimes make you wait up to seven years to qualify.

Luckily, lenders are willing to consider extenuating circumstances for mortgage applicants with prior credit problems. If approved, these explanations can massively reduce the time until you're eligible for a loan.

Waiting Periods After Significant Credit Events

All conventional and government-backed lenders make you wait a set amount of time before they will approve you following a significant credit event. The actual waiting period depends on the type of derogatory event and the guidelines that the lender follows.

Here’s a quick chart of the mortgage waiting periods after significant credit events, organized by the different types of lenders:

What Is an Extenuating Circumstance?

If you have a significant adverse event on your credit report, lenders must examine the situation and decide whether it was the result of:

• Disregard for your financial obligations

• Mismanaging/taking on too much debt

• Extenuating circumstances beyond your control

The specifics of what constitutes an extenuating circumstance can vary from lender to lender. That's because extenuating circumstances get examined case-by-case, with some underwriters having stricter requirements than others.

By most standards, an extenuating circumstance is defined as a non-recurring event out of your control that caused your negative credit. One crucial factor is that the extenuating circumstances must have left you with no reasonable alternative to defaulting on your debts.

This means that strategic defaults and other preventable credit issues will not qualify.

But if your adverse credit event resulted from extenuating circumstances, you may be eligible for a significantly reduced mortgage waiting period. However, you will need to provide third-party proof supporting your claims that the situation left you with no other option than default or bankruptcy.

What Do Lenders Consider Acceptable Extenuating Circumstances?

Lending guidelines are vague about what constitutes as extenuating circumstances for mortgage applicants. That's because much of the decision-making process is left to the discretion of the individual lenders.

However, some common scenarios which are broadly considered as extenuating circumstances include:

• Loss of employment

• Substantial medical debt

• Reduced household income resulting from the death of a spouse

But depending on the type of loan you're applying for, there might be other scenarios that may (or may not) qualify as extenuating circumstances. Here is a look at the specific guidelines lenders follow for different types of loans.

Conventional (Fannie Mae/Freddie Mac)

Unlike most government-backed loans, conventional lenders may consider divorce an acceptable extenuating circumstance. In addition to a divorce decree, Fannie Mae guidelines explicitly mention a few other ways to document extenuating circumstances:

• Medical bills

• Medical reports

• Job severance papers

• Notices of job layoffs

Freddie Mac guidelines are unspecific as to acceptable extenuating circumstances. While they don't mention any particular situations that are allowed, they note that the lender is obligated to obtain third-party evidence that your derogatory credit event was indeed the result of extenuating circumstances.

With all conventional loans, regardless of guidelines, you'll be required to provide a written letter detailing the situation that led to the negative mark on your credit. You'll also need to certify that the problem was out of your control and is unlikely to reoccur in the future.

FHA

The only extenuating circumstances that FHA guidelines explicitly mention are serious illness and the death of a wage-earning mortgage contributor. However, the guidelines specify two situations that are not extenuating circumstances: divorce and defaulting on a mortgage because of a relocation or job transfer.

FHA lenders may allow an exception to the divorce rule if a property was awarded to an ex-spouse, was current on its mortgage at the time of the court order, and later went into default.

USDA

USDA guidelines for their rural development loans are among the most comprehensive regarding extenuating circumstances. While not all-inclusive, the list of acceptable scenarios for USDA lenders includes:

• Temporary unemployment/job loss

• Benefits that had been delayed or reduced

• Illness

• Divorce

• Dispute over payments for defective services and goods

The USDA also mentions some cases where extenuating circumstances aren’t allowed to be used to shorten the mortgage waiting period:

• Default on a previous USDA loan

• Delinquent (non-tax) federal debts

• Past-due child support

• Debt or default related to other federal agencies

VA

Lender guidelines for VA mortgages mention that unemployment and extensive medical bills are acceptable as extenuating circumstances. Unlike other guidelines, the VA also carves out an exception for prolonged strikes that affected your ability to meet debt obligations.

VA rules also state that divorce is not considered an acceptable extenuating circumstance in most cases.

Waiting Period After Bankruptcy With Extenuating Circumstances

Lenders have different waiting periods after bankruptcy depending on the Chapter you filed. With extenuating circumstances, however, the waiting period becomes more standardized.

The exception is with USDA mortgage guidelines, which mention that Chapter 11 and 13 bankruptcies may be eligible less than 12 months after their discharge with extenuating circumstances. Similarly, Chapter 7 bankruptcies can receive exceptions before three years, although most individual lenders will require at least one year to have passed.

Here are the waiting periods after bankruptcy with extenuating circumstances for each of the following types of conforming mortgages:

Waiting Period After Foreclosure With Extenuating Circumstances

If you’ve lost a home in the past, you may need to wait up to seven years to apply for some mortgages. With extenuating circumstances, however, most government-backed lenders can approve you after just one year. Conventional lenders can approve you in as few as three.

Similar to their rules for bankruptcies, USDA guidelines state no minimum waiting period following a foreclosure with extenuating circumstances. Most lenders, however, will still require you to wait at least one year after the derogatory credit event.

Note: Freddie Mac guidelines for conventional loans specify that any borrower with a foreclosure, deed in lieu, or short sale within the past seven years, regardless of extenuating circumstances, can only qualify for a no cash-out refinance or purchase loan on a primary residence with at least 10% down.

Was Your Credit Event the Result of Extenuating Circumstances?

If your credit report has a significant derogatory event resulting from extenuating circumstances, you may still qualify for a conventional or government-backed mortgage. Shorter waiting periods still apply. But if you meet the criteria and have documentation of your extenuating circumstances, an experienced lending professional may be able to get you approved