Have you suffered a negative credit event, such as a short sale, foreclosure, or bankruptcy? You aren’t alone, as millions of Americans experienced the same issues. The good news is that you will be able to buy a home one day even with these issues in your past.
Just how long do you have to wait before you can buy a home? Keep reading to find out more.
Short Sales and Buying a New Home
If you sold your home for less than you owe under an agreement with your lender, you went through a short sale. Typically, a short sale damages your credit score less than a full-blown foreclosure, but it still lowers your credit score.
Luckily, the FHA, Fannie Mae, and Freddie Mac require just a 2-year waiting period after a short sale. This means that after the short sale completes, you can apply for a conventional or FHA loan after just 2 years. The VA doesn’t specify how long you must wait to apply for a VA loan after a short sale, but the 2-year window is typically a good amount of time to get your credentials back up and ready to take on a new mortgage.
Foreclosure and Buying a New Home
If you lost your home in a foreclosure, you may have to wait a while in order to buy a new home. If you want conventional financing, you could end up waiting as long as 7 years before you can get a loan. The only exception to this rule is if you have extenuating circumstances. For example, if you can prove that you lost your job because of an illness that made it hard to work, you could prove extenuating circumstances. If Fannie Mae approves your circumstances, they will decrease the waiting period to 3 years.
If you want a government-backed loan, such as the FHA or VA loan, you will have to wait 3 years for an FHA loan and 2 years for a VA loan. These are just guidelines, though. You will have to be able to prove to the FHA or VA lender that you have overcome the issues that caused the foreclosure, ensuring the lender that you aren’t a high risk of default any longer.
Bankruptcy and Buying a New Home
If you filed bankruptcy, you’ll typically have to wait 2 years after the date of the discharge in order to get any loan. Note that this differs from the date that you filed. The discharge date is the date you or your lawyer went to court and discharged your debts. Your two-year waiting period begins at that point, when you could start repairing your credit and redeeming yourself after the BK.
It does depend on the type of bankruptcy that you filed, though. There is a Chapter 7 and a Chapter 13 Bankruptcy. The Chapter 7 BK wipes all of your debts clean – it’s like starting with a clean slate. The Chapter 13 BK puts all of your debts into one payment, with a trustee overseeing the disbursement of the funds. Typically, you can get a mortgage just 12 months after a Chapter 13 BK, but you have to be able to prove that the trustee approves of your new loan and that it fits within your payment arrangement.
The only exception to this rule is the USDA loans – this loan program does require a waiting period of 3 years before you can apply for a loan.
Understanding the Waiting Periods
It’s important to understand that you are not automatically entitled to any type of mortgage once the waiting period expires. You must still prove that you can afford the loan. In other words, you must prove that you have enough income, a high enough credit score, and only a few debts to meet the credit score and debt ratio requirements of each program.
In addition, you may have to provide some compensating factors. Lenders look at foreclosures, short sales, and bankruptcies as high-risk. You have a history of defaulting on your debt, so the lender wants to make sure that you have qualifications that will help you avoid this from happening again.
It’s a good idea to have a high credit score, low debt ratio, and/or reserves on hand in order to ensure that you qualify for the loan and show the lender that you are no longer a high risk of default.
The good news is that you can qualify for a loan even after a negative economic event. The bad news is that you still have to find a lender willing to fund your loan. Luckily, lenders have gotten more lenient in recent years as long as you have the presence of compensating factors to make up for it.