Waiting Periods for Derogatory Events With Extenuating Circumstances

Getting a Mortgage After Derogatory Event
Cultura rm/gu/Getty Images

The real estate crisis between 2006 and 2011 resulted in a massive erosion of equity in real estate. That combined with high level of unemployment resulted in several homeowners losing homes because of various reasons. For them, the waiting period to qualify for a mortgage has been relatively high.

However, Fannie Mae reduced its mandatory waiting periods after a pre-foreclosure, short sale, or bankruptcy last summer.

At least for some would-be borrowers. Prior to the changes, which are in effect, Fannie Mae required borrowers to wait four years after a significant derogatory credit event before re-applying for a home loan. In some cases, they even required a 7-year hiatus. The mandatory waiting periods are now as little as 2 years for some borrowers.

Significant Derogatory Event

"Significant derogatory event" is defined as any one of the following, which may appear on a person's mortgage credit report:

  1. A pre-foreclosure

  2. A short sale

  3. A deed-in-lieu of foreclosure

  4. A bankruptcy

  5. A mortgage loan charge-off

Of course, just because you have patiently waited in the penalty box the allotted amount of time for your previous credit misgiving, does not mean you will always be able to get a new mortgage.

You must have also re-established your credit profile and credit scores. You also must be able to clearly and thoroughly document the situation that led to the derogatory event.

Showing that it was an isolated, one-time event based on “extenuating circumstances”.

With significant derogatory events often causing credit scores to plummet by 100 points or more, that rebuilding process can sometimes be time-consuming and difficult.

The documentation burden to prove “extenuating circumstance” proves to be the biggest challenge for many bounce back borrowers, though.

Fannie Mae and FHA Waiting Periods

The table below compares Fannie Mae prior policy against its current one; and against the FHA Back to Work program which may be more suitable for borrowers with less available down payment.

FHA loans permit home down payments of just 3.5 percent. Fannie Mae loans typically require 5 percent or more although there is a program allowing as little as 3% down.


Prior Minimum

New Fannie Mae Minimum

Current FHA Minimum

Short Sale

4 Years

2 Years

1 Year


4 Years

2 Years

1 Year



4 Years

2 Years

1 Year


What Are Extenuating Circumstances?

For a Fannie Mae loan, "extenuating circumstances" are situations which (1) occur one-time only; (2) are beyond the borrower's control; and, (3) result in a sudden, significant, and prolonged reduction in income.

The label of "extenuating circumstances" may also be applied to situations in which a borrower is subject to a catastrophic increase in financial obligations. Examples of extenuating circumstances may include divorce, illness, sudden loss of household income, and/or job loss. All of these are common problems for many during the Great Recession and housing crash from which we recently emerged.

Mortgage applicants wishing to apply for a loan using Fannie Mae's Extenuating Circumstances program should be prepared to provide documentation in support of the claim.

 Valid documentation may include a copy of a divorce decree; medical bills; and, notice of job loss or job severance papers. Borrowers must be able to clearly link the major derogatory event to the extenuating circumstances and show that they were the actual cause of the issue.

Proving to underwrite that the events were isolated and you have learned from the lesson is key to obtaining an extenuating circumstance mortgage approval. As always a skilled mortgage professional can walk you through the documentation needed and guide you based on your specific scenario.