Sometimes bad things happen and you end up upside down in your home purchase without a way to pay off your debt. This is an emotionally, physically and psychologically difficult period of time for owners who have no other option but to allow their home to be foreclosed or sold at a short sale.
A foreclosure means the bank takes your home away. You no longer have to make mortgage payments, but you also no longer have a house and your credit takes a serious hit. When your home is sold at a short sale, the house is typically sold for less than you owe. The bank is essentially forgiving a portion of your debt in order to get at least some of what they are owed.
Different areas of the country have specific laws regarding how soon after a foreclosure or short sale you are eligible to apply for a new home loan. FHA loans typically allow a previous homeowner to apply two or three years following a bankruptcy, but you may be able to qualify immediately if you did not have any late payments before your short sale.
Fannie Mae, which backs all conventional loans in the US, has established a series of separate waiting periods for borrowers, depending on the type of "derogatory credit event" (as they say in real estate financing circles) in their past. Here are the guidelines, current as of 2018.
Waiting Periods to Buy
- Buying After a Foreclosure: seven years
- Buying After a Foreclosure With Extenuating Circumstances: three years
- Buying After a Deed-in-Lieu of Foreclosure: four years
- Buying After a Deed-in-Lieu of Foreclosure With Extenuating Circumstances: two years
- Buying After a Short Sale: four years
- Buying After a Chapter 7 or 11 Bankruptcy: four years
In addition to the required waiting period, you must have at least some sort of down payment. Ideally you should have at least 20 percent. You are much more likely to get approved for a loan with reasonable interest rates if you have saved up. You must have at least 5 percent to qualify, but more is always better.
Following a foreclosure and/or short sale, your credit is going to take a hit. While this credit damage is going to hang around for several years, you can take steps to improving other areas of your credit score. This will make it much easier to get financing for anything following your home loss. During the time you must wait before purchasing a home again, here are a few things you can do to help give your credit a boost:
Pay all of your bills on time: Utilities, rent, cell phones, credit cards, auto loans etc. Your credit reflects how often you are late and this can significantly reduce your credit score. Set up your bills on automatic payment so they are taken out of your account before you even see the cash to ensure on time payments.
Reduce your debt: Debt to income ratio plays a major role in your credit score. The higher the debt to income ratio, the worse off you are. Pay off as many loans and credit cards as possible but leave the accounts open to increase the amount of available credit you have. Don’t spend your credit, but leave it there to show lenders you aren’t irresponsible with spending.
Get a better job: Find a higher paying job. This not only improves you debt to income ratio, but it also shows that you are committed to staying in the community and being productive. This reflects well on your credit score.
Securing financing for a home loan after a foreclosure or short sale isn’t easy and it will take several years (in most cases) before you can even consider applying for another loan. Take the time to improve your credit and build up a savings so you are prepared to make a down payment when the time is right.