Some people hesitate to declare personal bankruptcy. It is a big step, and it is not a decision to be made lightly. However, someone deeply in debt should not worry that personal bankruptcy will close doors for them. There are rules, and there are waiting periods, as we have discussed in our last few posts, but bankruptcy is not “the end.” It is, as we say often, a fresh start.

And, thanks to a rule tweak by Fannie Mae, that fresh start can kick off a little sooner.

We left off in our last post with a brief rundown of the changes to the waiting period for home loan applicants with a “derogatory event” on their credit history. If an applicant qualifies for an “exception for extenuating circumstances,” the waiting period between a bankruptcy or foreclosure and obtaining a loan backed by Fannie Mae is dramatically reduced.

We discussed the timeline for Chapter 7 and Chapter 13 bankruptcy. What happens if you have more than one bankruptcy on your credit history?

Multiple bankruptcies: For individuals with more than one bankruptcy in the past seven years, the waiting period begins on the most recent discharge or dismissal date. Generally, the applicant must wait five years, but the exception reduces that to three years.

Foreclosure: The waiting period begins on the date the foreclosure is reported as complete by the lender or on the credit report. The period lasts for seven years but drops to three years with extenuating circumstances. There are other requirements as well that a borrower should discuss with an attorney or the lender.

Also, the exception only applies to a mortgage on the borrower’s primary residence. If the borrower is purchasing a second home or investment property or is pursuing a cash-out refinance on any property, the seven-year waiting period remains.

We will finish this up in our next post.

Source: Fannie Mae Selling Guide, Sec. B3-5.3-07: Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit, July 29, 2014