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How to Buy a Home After Bankruptcy, Foreclosure or Short Sale.

Home Loans UPDATED ON January 4, 2017 BY Tony Mariotti
How to Buy a Home After Bankruptcy, Foreclosure or Short Sale.

Are you a “boomerang buyer” – a person who’s been kept out of the housing market due to a prior foreclosure, short sale or bankruptcy but want buy a home again?

7 million people lost their homes in the Great Recession. But a lot has happened since then; the passage of time healed many wounds. Credit scores have risen nationally. Waiting periods – the amount of time that must transpire between a major derogatory credit event and getting a new mortgage – for major loan programs have been met. For example, a borrower who lost his/her home at one time may now qualify for a FHA loan with a modest 620 FICO score if 3 years out from foreclosure.

For people who lost their homes a few years ago, underwriting guidelines for most loan programs will be accommodating.

Mortgage Waiting Periods

All mortgage programs have borrower and property requirements. One requirement is a waiting period, the amount of time that must pass after derogatory credit events like bankruptcy, foreclosure or a short sale. If any of those events have been a part of a borrower’s past, they’ll need to:

  • Re-establish their credit, and
  • sit out of the housing market for a specified period.

After a minimum waiting period, which varies depending upon the type of home loan program and severity of the credit event, borrowers may be eligible to buy a home again.

Regardless of how long a borrower sits out the market, they’ll also need to re-establish good credit. That means paying bills on time and in full, which helps improve one’s credit score.

Extenuating Circumstances

If the original derogatory credit event happened because of extenuating circumstances, waiting periods may be reduced.

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. For example, a serious illness or death of a wage earner could qualify. Borrowers will need to verify that circumstances beyond their (or their spouse’s control) such as unemployment, prolonged strikes, medical bills not covered by insurance, etc.

In many cases, the extenuating circumstances included a creditor requirement for a short sale or deed-in-lieu of foreclosure. So many borrowers find that they are eligible for a shorter waiting period.

Conventional Loan / Fannie Mae Waiting Periods

Chapter 7 Bankruptcy

  • 4-year waiting period required from the discharge or dismissal date to the lender’s credit report date.
  • 5 years for borrowers with more than one bankruptcy filing within the last seven years.
  • 7 years for borrowers who own 5 to 10 financed properties (including primary residence).

Chapter 13 Bankruptcy

  • 2-year waiting period from discharge date or 4 years from dismissal date to the lender’s credit report date.
  • 5 years for borrowers with more than one bankruptcy filing within the last seven years.
  • 7 years for borrowers who own 5 to 10 financed properties (including primary residence).

Deed-in-Lieu of Foreclosure, Preforeclosure (Short Sale)

  • 4 years from completion date to the disbursement date of the new loan.
  • Reduced to 2 years if due to extenuating circumstances.

Foreclosure

  • 7 years from the completion date of the foreclosure action to the disbursement date of the new loan.
  • Reduced to 3 years if foreclosure due to extenuating circumstances.

Mortgage Charge-Off

  • 4 years from the mortgage charge off date to the disbursement date of the new loan.
  • Reduced to 2 years if charge-off due to extenuating circumstances.

FHA Waiting Periods

Chapter 7 Bankruptcy

  • 2-year waiting period required from the discharge or dismissal date to the lender’s credit report date.

Chapter 13 Bankruptcy

  • Minimum 1 year of timely payout according to the repayment plan at the time of application.
  • Trustee permission letter required for a new mortgage.

Deed-in-Lieu of Foreclosure, Preforeclosure (Short Sale)

  • 3-year waiting period required from foreclosure end date to loan approval date.

Foreclosure

  • 3-years from foreclosure end date to loan approval date.

Mortgage Charge-Off

  • Not addressed by FHA guidelines. Falls to HUD Homeownership Center jurisdiction.

USDA Rural Development Waiting Periods

Chapter 7 Bankruptcy

  • 3-year waiting period

Chapter 13 Bankruptcy

  • Minimum 1 year of timely payout according to the repayment plan at the time of application.
  • Trustee permission letter required for a new mortgage.

Deed-in-Lieu of Foreclosure, Preforeclosure (Short Sale)

  • 3-years required at the time of an application for new loan.

Foreclosure

  • 3-years required at the time of a new loan application.

Mortgage Charge-Off

  • 3-years required at the time when the borrower applies for a new loan.

VA Loan Waiting Periods

Chapter 7 Bankruptcy

  • 2 years since bankruptcy discharge.

Chapter 13 Bankruptcy

  • Minimum 1 year of timely payout according to the repayment plan at the time of application.
  • Trustee permission letter required for a new mortgage.

Deed-in-Lieu of Foreclosure, Preforeclosure (Short Sale)

  • The effect on the veteran’s credit must be examined on a case-by-case basis. Cause for the short sale or DIL may have been beyond the borrower’s control (extenuating circumstances).

Foreclosure

  • 2 years since date of foreclosure.

Mortgage Charge-Off

  • VA does not specify a minimum waiting period. A mortgage charge-off must be considered recent, derogatory credit and must be reviewed by the underwriter and taken into consideration regarding the borrower’s satisfactory credit risk.

WRITTEN BY

Tony Mariotti

Tony Mariotti

Tony Mariotti is the founder of RubyHome. In addition to helping folks get home loans, he is a sought-after blogger. His favorite topics are online marketing, real estate and mortgages.

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COMMENTS

  • Jennifer N.

    Now I have been hearing if the short sale was included in the ch 7 bankruptcy and it was not a FHA loan that only the 2 year rule would apply for a new fha loan.

    They would only use the bankruptcy date.

    Do you also believe this to be true?

    Thank You!

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