Buying A Home After A Foreclosure, Short Sale, or Bankruptcy

June 5, 2013

A black mark on your credit history does not mean you will have to be a renter for the rest of your life.


If you fell victim to a foreclosure, short sale, or bankruptcy during the housing crash, you still have hopes of becoming a homeowner again.  Although these events can show up on your credit report for up to seven years, you may be able to qualify for a mortgage after just two or three years, in some cases.

Foreclosure

Federal Housing Administration (FHA) Loans

Generally speaking, you won’t be able to qualify for a mortgage loan for at least 7 years after your foreclosure. However, according to the FHA, if the foreclosure of your owner-occupied property was the result of “extenuating circumstances”, an exception may be granted for the purchase of a primary residence after 3 years if you have since established good credit.

Veterans Administration (VA) Loans

If you previously had a foreclosure on a non-VA loan or a deed is given in lieu of foreclosure, then there would be at least a two-year waiting period before you can apply for VA loan to purchase a new home. That waiting period is given as a suitable timeframe to improve and reestablish your credit (in the case of a short sale, the waiting period is one year).

However, if you had previously foreclosed on a VA loan, then the two-year waiting period applies and you must have repaid the loss suffered by the VA as a result of the foreclosure.  This will restore your full entitlement for VA loans. Until the government is repaid for their loss, you unfortunately would not qualify for a new VA loan.

Short Sale

A short sale is when a property is sold with the consent of the lender for less than what is owed on the mortgage. A short sale can help borrowers avoid a foreclosure from showing up on their credit report, and it can also help lenders avoid high transaction costs associated with foreclosure proceedings.

Following a short sale, a borrower may qualify for an FHA loan two years after a short sale, unless the borrower was in default at the time of the short sale (in which case, the waiting period is three years).

Fannie Mae has more complicated guidelines:

  • Two-year waiting period with a 20% down payment
  • Four-year waiting period with a 10% down payment
  • 7 years with standard down payment guidelines

Bankruptcy

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy results in a business ceasing operations and going completely out of business. A trustee is appointed to sell off the debtor’s assets, and the money is used to pay off debt.

The FHA’s guidelines indicate that there is a two-year period that must elapse since the discharge date of the Chapter 7 Bankruptcy before it will consider lending to you again. Aside from providing an explanation of the bankruptcy in the mortgage application, you must have re-established a good credit history since the bankruptcy, and have the necessary financial and employment stability.

Chapter 13 Bankrupty

A Chapter 13 bankruptcy (also known as a wage earner's plan),  enables individuals with regular income to develop a plan to repay all or part of their debts. Under this type of arrangement, your creditors would propose a repayment plan that allows you to make payments over a course of three to five years.

To get an FHA loan after a Chapter 13 bankruptcy, your repayment plan has to be satisfactorily followed for a period of at least 2 years before you will qualify for a loan. Aside from providing an explanation of the bankruptcy in the mortgage application, you must have re-established a good credit history since the bankruptcy, and have the necessary financial and employment stability.

About the Author – Fernando Santillan

Fernando Santillan is a Fresno-based housing and financial blogger for 1st Continental Mortgage | Starrr, Inc.

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