What Qualifies as Extenuating Circumstances
Fannie Mae defines extenuating circumstances very specifically. The event must be nonrecurring, beyond your control, and result in either a sudden drop in income or a major increase in your financial obligations. The key word here is "sudden" — gradual changes don't qualify.
Say you were laid off from your job due to company downsizing. This could qualify as extenuating circumstances if it led to a foreclosure or bankruptcy. The layoff was beyond your control, it was a one-time event, and it caused an immediate loss of income.
Medical emergencies often qualify too. If you or a family member had a serious illness that created massive medical bills and prevented you from working, this could explain derogatory credit events during that period.
Divorce frequently qualifies when it results in significant financial strain. The legal costs, division of assets, and change in household income can create circumstances where maintaining mortgage payments becomes impossible.
Required Documentation to Prove Your Case
The lender needs two types of documentation from you. First, documents that confirm the event actually happened. Second, documents that show how this event prevented you from resolving your financial problems.
For the event itself, you need official documentation. A divorce requires a copy of the divorce decree. Medical issues need medical reports or hospital bills. Job loss requires layoff notices, severance papers, or unemployment benefit statements.
For proving the financial impact, you might provide insurance claim settlements, property listing agreements if you tried to sell assets, lease agreements if you had to relocate, or tax returns covering the periods before, during, and after the event.
Say you had a house fire that destroyed your home and belongings. You would provide the insurance claim documentation, receipts for temporary housing costs, and evidence of lost income if you couldn't work during the recovery period.
The Written Explanation Requirement
Beyond the documentation, you must provide a written explanation in your own words. This can be a letter, email, or other written statement that connects the dots between the event and your credit problems.
Your explanation needs to accomplish three things. First, describe what happened and when. Second, explain how this event directly caused your financial difficulties. Third, demonstrate that you had no reasonable alternatives to defaulting on your obligations.
The explanation should be detailed and specific. Don't just say "I got divorced and couldn't afford my mortgage." Explain the timeline, the financial impact of legal fees, how your income changed, what steps you took to try to avoid default, and why those steps weren't sufficient.
Why Fannie Mae Requires This Documentation
Fannie Mae distinguishes between borrowers who defaulted due to circumstances beyond their control versus those who simply overextended themselves financially or made poor decisions. Borrowers who faced true extenuating circumstances are considered better credit risks going forward.
The documentation requirements exist because lenders need proof, not just your word. Anyone can claim they had extenuating circumstances. The official documents and detailed explanation help underwriters verify that your situation truly fits the definition.
This distinction affects your eligibility for new loans and the waiting periods after bankruptcy or foreclosure. Borrowers with documented extenuating circumstances may qualify for shorter waiting periods before they can get another mortgage.
Common Situations That Don't Qualify
Not every financial hardship qualifies as extenuating circumstances. Gradual income decline doesn't count — it has to be sudden and significant. Normal life events like having children or taking a lower-paying job typically don't qualify unless there are unusual circumstances involved.
Speculative investments gone wrong don't qualify. If you bought investment properties that lost value or took on debt for business ventures that failed, these are considered voluntary risks you chose to take.
Credit card debt from overspending doesn't qualify either. Even if the debt became overwhelming, this represents poor financial management rather than circumstances beyond your control.
Documentation Challenges and Tips
Gathering the right documentation can be tricky, especially if the events happened years ago. Start collecting documents as soon as you know you'll be applying for a mortgage. Medical records, legal documents, and employment records can take time to obtain.
If original documents are lost, contact the issuing agencies for copies. Hospitals keep medical records for years, courts maintain divorce records, and employers often have personnel files available.
The timing of your documentation matters. The papers need to show a clear connection between the event and your credit problems. If there's a gap between when the event occurred and when you defaulted, you'll need to explain why the impact was delayed.
Some borrowers struggle with the written explanation because they're not sure what level of detail to include. Err on the side of providing too much information rather than too little. The underwriter needs to understand your complete situation.
How Lenders Evaluate Your Case
Lenders look for consistency between your documentation and explanation. If your divorce decree shows the divorce was final in January but you didn't miss mortgage payments until June, you need to explain what happened during those months.
The underwriter will also consider whether your response to the crisis was reasonable. Did you try to sell assets, find new employment, or work with creditors before defaulting? These efforts show you weren't simply walking away from your obligations.
Current financial stability matters too. Even with documented extenuating circumstances, you still need to demonstrate that your current income and credit situation support taking on a new mortgage.
References
For the official guidelines, see B3-5.3-08: Extenuating Circumstances for Derogatory Credit in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B3-5.3-08, Extenuating Circumstances for Derogatory Credit (12/16/2014)
Extenuating Circumstances
Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include
documents that confirm the event
such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.; and
documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event
such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.
The lender must obtain a written explanation from the borrower explaining the relevance of the documentation. The written explanation must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate that the borrower had no reasonable options other than to default on his or her financial obligations. The written explanation may be in the form of a letter from the borrower, an email from the borrower, or some other form of written documentation provided by the borrower.
