Couple hopefully reviewing iQRATE Mortgages loan options.

FHA vs Conventional After Hardship in California

Q: What is the FHA loan waiting period after a Chapter 7 bankruptcy?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: Can I get an FHA loan while I'm still in a Chapter 13 bankruptcy plan?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: How long do I have to wait for a conventional loan after a foreclosure?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: Can mortgage waiting periods be shortened if my financial hardship was due to an extenuating circumstance?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: What are the different minimum credit score requirements for FHA and conventional loans?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: How do lenders view new late payments made after a bankruptcy or foreclosure?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Will I have to pay a higher interest rate on a mortgage after a bankruptcy or foreclosure?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

February 27, 2026

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

Contact Me At

(702) 766-3744

NMLS 1486726

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TL;DR

This overview explains the different waiting periods for securing a mortgage in California after a major financial event like bankruptcy or foreclosure. Key takeaways include:

FHA vs. Conventional Timelines: FHA loans typically offer a much faster path to homeownership. For instance, the waiting period after a Chapter 7 bankruptcy is two years for an FHA loan, compared to four years for a conventional loan. After a foreclosure, the wait is three years for FHA versus seven for conventional.
Impact of Bankruptcy Type: The mortgage timeline is heavily influenced by whether you file for Chapter 7 (liquidation) or Chapter 13 (repayment plan). With a Chapter 13, you may be eligible for an FHA loan after just 12 months of on-time payments, well before the plan is complete.
Extenuating Circumstances: Both FHA and conventional loan guidelines allow for shorter waiting periods if the financial hardship was caused by a documented, non-recurring event beyond your control, such as the death of a primary wage earner or a serious illness.
Credit Score Flexibility: FHA loans are designed to be more accessible, with a minimum credit score requirement as low as 500, whereas conventional loans generally require a minimum score of 620.

FHA Loan Waiting Period After Bankruptcy in Sacramento

For many homebuyers in Sacramento recovering from bankruptcy, a Federal Housing Administration (FHA) loan offers one of the fastest routes back to homeownership. The mandatory waiting period, often called a 'seasoning period', is significantly more lenient than conventional loan standards. The specific timeline depends on the type of bankruptcy filed.

Chapter 7 Bankruptcy

If you filed for Chapter 7 bankruptcy, which involves the liquidation of assets to pay off creditors, the FHA requires a waiting period of two years from the date of discharge. A discharge is the court order that releases you from liability for your debts. During this two-year period, lenders will expect you to:

Re-establish good credit: This means making all payments on time for any new credit you've obtained, such as a secured credit card or a small auto loan.
Avoid new credit issues: Any late payments or collections after the bankruptcy will be a major red flag for underwriters.
Show stable income: You must demonstrate a consistent and reliable employment history since the bankruptcy.

For example, if a Sacramento resident's Chapter 7 bankruptcy was discharged on May 1, 2022, they could begin the FHA loan application process on May 2, 2024, provided they have managed their finances responsibly in the interim.

Calendar showing a waiting period for a home loan.

Chapter 13 Bankruptcy

With a Chapter 13 bankruptcy, you enter a 3- to 5-year repayment plan. The FHA guidelines are remarkably flexible here. You do not have to wait for the discharge. An applicant can be eligible for an FHA loan after they have made at least 12 months of on-time payments under their bankruptcy plan. In addition to meeting standard FHA credit requirements, you must also provide written permission from the bankruptcy court or trustee to take on new mortgage debt.

Conventional Loan Waiting Period After Foreclosure in Fresno

A conventional loan, which is not insured by a government agency and typically follows guidelines set by Fannie Mae and Freddie Mac, has much stricter seasoning periods after a major credit event like a foreclosure. For a homebuyer in Fresno who has gone through a foreclosure, the standard waiting period is seven years.

This seven-year clock begins on the completion date of the foreclosure action as reported on your credit report. This is a substantial waiting period that makes conventional financing inaccessible for many in the years immediately following the loss of a home.

There are slightly shorter periods for other related events:

Deed-in-Lieu of Foreclosure: 4 years
Short Sale: 4 years
Bankruptcy (Chapter 7): 4 years

When you compare this to the FHA's three-year waiting period after a foreclosure, the FHA is clearly the more forgiving option. A seven-year wait can feel like a lifetime, while a three-year period is a much more manageable goal for re-entering the housing market.

Are There Exceptions for Extenuating Circumstances?

Yes, both FHA and conventional loan programs have provisions for shortening these waiting periods if the financial hardship was caused by a documented extenuating circumstance. An extenuating circumstance is defined as a non-recurring event that was beyond your control and resulted in a sudden, significant loss of income or increase in financial obligations.

Valid examples include:

Death of a primary wage earner
A serious long-term illness or medical event
Job loss or a significant reduction in income due to employer-related issues, not poor performance

Divorce is not typically considered an extenuating circumstance unless the financial hardship was directly tied to the death of an ex-spouse responsible for alimony or child support.

How Exceptions Affect Timelines

Conventional Loans: With documented extenuating circumstances, the waiting period after a foreclosure can be reduced from seven years to three years. For a bankruptcy, it can be reduced from four years to two years.
FHA Loans: FHA guidelines allow for the waiting period to be reduced to as little as 12 months after a foreclosure or bankruptcy. This is a significant exception, but the documentation standards are extremely high. You must prove the issue is resolved and your financial situation is stable.

Which Loan Program Has More Flexible Guidelines for Lower Credit Scores?

The FHA loan program is unequivocally more flexible and forgiving for homebuyers with lower credit scores. This is one of its primary design features: to make homeownership accessible to borrowers who may not meet the stricter criteria of conventional lending.

FHA Credit Score Requirements: The absolute minimum credit score set by the FHA is 500.
- With a credit score of 580 or higher, you can qualify for the maximum financing of 96.5%, requiring only a 3.5% down payment.
- With a credit score between 500 and 579, you must provide a larger down payment of at least 10%. However, it's important to note that many lenders impose their own 'overlays', meaning they might require a score of 600 or 620 even for an FHA loan. (The data, information, or policy mentioned here may vary over time.)

A house model next to a calculator, representing mortgage financing options.

Conventional Credit Score Requirements: The generally accepted minimum credit score for a conventional loan is 620. However, following a major event like a bankruptcy or foreclosure, most lenders will want to see a much higher score, often 640, 680, or even more, to compensate for the perceived risk. It is nearly impossible to get approved for a conventional loan with a score below 620.

For a homebuyer in Sacramento with a post-bankruptcy score of 630, an FHA loan is a viable path forward, while a conventional loan would likely be out of reach.

Chapter 7 vs. Chapter 13 Bankruptcy: How Timelines Differ

The type of bankruptcy you file has a massive impact on your mortgage timeline, creating two very different paths depending on your choice.

Path 1: Chapter 7 (Liquidation)

With a Chapter 7 filing, the key date is the discharge date. The waiting period clock does not start until the court officially discharges your debts.

FHA: 2 years from discharge.
Conventional: 4 years from discharge.

Path 2: Chapter 13 (Reorganization)

Chapter 13 is where the rules diverge significantly, especially for FHA loans. Because you are in an active repayment plan, lenders can assess your current payment history.

FHA: You can apply for a mortgage while still in an active Chapter 13 plan. The primary requirements are making 12 consecutive, on-time plan payments and getting the court trustee's approval. This can put you in a new home years before your plan is even complete.
Conventional: You must wait until your debts are discharged or the case is dismissed. The waiting period is two years after a discharge or four years after a dismissal.

This makes the FHA loan a powerful tool for those in a Chapter 13 plan who have demonstrated a year of responsible payments and want to buy a home without waiting for the full 3-5 year plan to conclude.

How Do Lenders View Late Payments After the Financial Hardship Occurred?

Lenders view post-hardship credit behavior with intense scrutiny. Your ability to manage credit responsibly after the bankruptcy or foreclosure is the single most important factor in their decision. The waiting period is designed to give you time to prove that the past event was an anomaly, not a pattern.

Any late payments, new collections, or maxed-out credit cards during the seasoning period are considered major red flags. An underwriter's logic is simple: if you can't manage small debts after a major reset, how can you be trusted with a large mortgage payment? A clean and perfect payment history post-hardship is non-negotiable for most lenders.

What Are the Mortgages for Bad Credit Options Available in California?

For California homebuyers in cities like Sacramento and Fresno with damaged credit, several options exist, with FHA being the most common and accessible.

FHA Loans: This is the go-to program. It offers low down payments, flexible credit guidelines, and the shortest waiting periods after financial hardship.
VA Loans: For eligible veterans and active-duty service members, VA loans are even more forgiving than FHA loans. They often have no minimum credit score requirement (though lenders usually set a floor around 620). (The data, information, or policy mentioned here may vary over time.)
Non-QM Loans: Non-Qualified Mortgages are for borrowers who don't fit into the FHA or Conventional boxes. These loans rely on alternative qualification methods, like using bank statements instead of tax returns. They can be an option for those with a recent credit event but typically require a larger down payment (20% or more) and come with higher interest rates.

Will I Face a Higher Interest Rate on a Home Loan After a Credit Event?

Yes, it is almost certain you will face a higher interest rate after a significant credit event. Lenders determine interest rates based on risk. A lower credit score and a history of bankruptcy or foreclosure signal a higher risk of default, and lenders price that risk into the interest rate.

For conventional loans, this is formalized through Loan-Level Price Adjustments (LLPAs). These are fees set by Fannie Mae and Freddie Mac that are based on risk factors like your credit score and loan-to-value (LTV) ratio. A borrower with a 640 score will have a much larger LLPA than a borrower with a 740 score, resulting in a higher interest rate.

While FHA loans don't use LLPAs in the same way, the overall interest rate offered by lenders will still be higher for lower-credit-score applicants. Furthermore, FHA loans require a Mortgage Insurance Premium (MIP). This includes an upfront premium and an annual premium paid monthly. For most borrowers, this MIP lasts for the life of the loan, adding a significant long-term cost that must be factored in. If you're navigating the mortgage process in California after a financial setback, understanding your specific timeline is the first step. A knowledgeable mortgage strategist can assess your unique situation and map out the most forgiving path to homeownership.

Ready to explore the most forgiving path to your new home? Apply now to get a clear, personalized assessment and take the first confident step toward your new home.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.