Credit & Underwriting
~11 min read · Read tradelines, derogatory events and waiting periods after BK/foreclosure.
The credit report is the borrower's financial biography, and underwriting reads it for patterns: score tiers, derogatory events, and — the exam's favorite — the waiting periods that follow bankruptcies and foreclosures, program by program.
Scores and tradelines
Mortgage lending pulls a tri-merge report; classic practice takes each borrower's middle score and the transaction uses the lowest middle score among borrowers (newer conventional frameworks average differently, but middle-score logic remains the exam default). Score floors: conventional ≈620, FHA 580 (3.5% down) / 500 (10% down), VA/USDA guideline-driven. Underwriters read tradelines for payment history, utilization, depth, and disputes; authorized-user accounts and freshly opened debt get scrutiny; inquiries within the shopping window count as one for scoring.
- Tri-merge; middle score per borrower, lowest governs
- 620 conventional / 580–500 FHA floors
- Utilization, history depth, new debt all read behind the number
Derogatory events and waiting periods
The benchmark table (standard, extenuating circumstances can shorten): Chapter 7 bankruptcy — conventional 4 years from discharge, FHA 2 years, VA 2 years. Chapter 13 — conventional 2 years from discharge (4 from dismissal); FHA can lend during the plan after 12 months of on-time payments with court permission, or 1 year post-discharge practice. Foreclosure — conventional 7 years, FHA 3 years, VA 2 years. Short sale / deed-in-lieu — conventional 4 years, FHA 3. Collections/judgments: paid or payment-planned per program; tax liens resolved or arranged.
- Ch.7: 4 conv / 2 FHA; Ch.13: FHA mid-plan possible at 12 months
- Foreclosure: 7 conv / 3 FHA — the widest spread, most tested
- Short sale/DIL: 4 conv / 3 FHA
- Extenuating circumstances can compress timelines
Explanations and red flags
Letters of explanation contextualize derogatories, gaps, inquiries, and address mismatches — factual, dated, borrower-signed. Underwriting red flags: disputes on major tradelines (often must be resolved), recent credit-shopping sprees, debts appearing between application and closing (soft-pull refreshes catch them), and any coaching to 'temporarily' pay down or hide obligations. The MLO's lane: gather explanations, never author them.
Worked example
A borrower lost a home to foreclosure in March 2022 following a documented medical crisis, then filed and discharged a Chapter 7 in January 2023. In mid-2026 she asks: 'Can I buy again, and with which program?' Scores are mid-600s.
Run each clock separately from its own event. FHA: foreclosure needs 3 years — March 2022 + 3 = March 2025, satisfied; Chapter 7 needs 2 years — January 2023 + 2 = January 2025, satisfied. FHA works now, and her mid-600s clear the 580 floor for 3.5% down. Conventional: foreclosure demands 7 years — March 2029; the 4-year bankruptcy clock ended January 2027 wouldn't matter because the LONGEST applicable wait governs (though when a foreclosure was included in the bankruptcy, agency rules can run timelines from the discharge — the documented medical crisis also opens extenuating-circumstances shortening). Exam answer: FHA-eligible today; conventional waits (absent extenuating-circumstance approval). Program-by-program clocks, event-by-event.
Common exam pitfalls
Applying one waiting period to every program.
Each program has its own table — the 7-vs-3 foreclosure spread between conventional and FHA is the classic test.
Running all clocks from the bankruptcy filing date.
Clocks run from DISCHARGE (bankruptcy) or completion (foreclosure/short sale), event by event.
Advising borrowers to hide or 'pause' debts before closing.
Pre-closing refreshes surface new debt; coaching concealment is misrepresentation.
Seven-three the foreclosure split, four-two the fresh-start wait — every event runs its own stopwatch.
Recap
- Tri-merge, middle score, lowest borrower governs
- Floors: ~620 conventional, 580/500 FHA
- Ch.7: 4y conv / 2y FHA; Ch.13: FHA possible mid-plan
- Foreclosure: 7y conv / 3y FHA; short sale: 4/3
- Extenuating circumstances compress; documentation decides
- LOEs are the borrower's words; new debt before closing gets caught
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