Many people are finding themselves in a tough situation after a job loss or income loss, and have ended up short selling their home, or worse, going through a foreclosure.
There is hope after a distress sale; with some credit repair and some time, most people can buy a home again. However, there are many factors that will affect your ability to qualify for a loan. Here are some general guidelines for buying a home after a distress sale:
After A Short Sale: the best-case scenario:
VA: You can buy a home with a VA loan two years after a short sale on a prior VA loan, with a zero down payment. It can be less if you have NOT been late on a payment and have a minimum credit score of 660.
With a clear CAIVRS, a report pulled by lenders for government loans (FHA, VA, and USDA) your time may be less than 2 years. You also must document the hardship.
After a short sale, a buyer can get another mortgage in 1 day…if they had no late payments on the previous mortgage or any credit lines. Or, you may be eligible under the FHA Back to Work Economic Event Extenuating Circumstance Program**. If they were late on a payment, FHA looks at the short sale as if it was a deed-in-lieu of foreclosure and the new loan will be manually approved, given the best-case.
In a Short Sale, if the buyer was never late on a payment, they can buy another home immediately, as long as their credit scores are good and as long as they don’t buy a superior house. They have to have good extenuating circumstances, like a job relocation, which has to be outside a 100 mile radius. Again, this is a best-case scenario. Most of the time, there will be some credit repair necessary.
Conventional Financing: Fannie Mae has changed the guidelines for the waiting period to qualify and buy using a conventional loan. Until August 16, 2014, buyers can get another loan after 2 years post-short sale, with a 20% down payment. After that date, the waiting period has been extended to
- 7 years, with a downpayment less than 10%. Your credit score must be a minimum of 680. A larger down payment doesn’t help get a loan sooner.
- However, documented extenuating circumstances may lessen the waiting time.
- Buyers with a 10% downpayment must wait 4 years.
- If a buyer has acceptable extenuating circumstances and they are documented, they may be able to get a conventional loan in 2 years with a 20% down payment.
What are acceptable extenuating circumstances? This is a non-recurring event that was out of the homeowner’s control. It had to cause a significant loss of income or significant increase in expenses so that they were unable to pay their mortgage. These events had to be temporary, not likely to happen again. This can be loss income, unemployment, serious illness or large medical bills. It must be documented and you must write a letter explaining the events. Divorce is not an extenuating circumstance according to FHA, it is considered “financial mismanagement”.
VA and USDA will consider these previous events as hardships, as well as delay or reduction of government benefits. They all give local lenders some leeway to grant exceptions to home buyers with extenuating circumstances.
I’m sure that you’re seeing the need for Documentation with all of these circumstances.
After a Foreclosure: the best-case scenario:
Many lenders require a minimum waiting period after a foreclosure before you can apply for a new mortgage loan:
- three years for FHA loans
- seven years for Fannie Mae/Freddie Mac loans
- two years for Veterans Affairs loans
- three years for USDA loans
- other lenders have different waiting periods.
But you may be able to shorten some of this time. This requires proving that the foreclosure was due to a qualifying hardship. A medical disaster, layoff or business failure may qualify. This may get you Fannie Mae or Freddie Mac loan in as little as three years. And it may shorten the VA or FHA loan waiting period to only one year.
Building the credit score back to health takes more time after a foreclosure than a short sale, because there can be as much as a 300 point difference in the credit score. It is much easier and takes less time to repair a credit score after a short sale, another good reason to go through the hassle and work to avoid foreclosure.
If you’ve had to sell your home through a short sale, repairing your credit is possible. I you pay all your bills on time, establish credit over time, and save some money for a downpayment, as little as 3.5% for an FHA loan, you will be able to purchase a home again. Remember, you must start to repair your credit on the first day after the distress sale.
This 15 Minute video with our friend and Credit Counselor, Blair Warner, with Upgrade My Credit, has many great tips for those recovering from a short sale or foreclosure:
- Common Mistakes with Short Sales
- How To Recognize and Avoid a Foreclosure Scam
- The 7 Most Dangerous Short Sale Myths
Chris Highland has a CDPE certification, Certified Distressed Property Specialist. If you or someone you know is having trouble making their mortgage payment through financial difficulty like job loss or illness, give us a call for a discreet conversation. We may be able to help you avoid foreclosure. 301-401-5119
** For Details on the
FHA Back to Work Extenuating Circumstances Program
For Credit Repair, consider hiring a Credit Repair Specialist