Buying
a home is a challenging goal for most hopeful homeowners. But for those
who have experienced a bankruptcy, foreclosure or short sale, the
hurdles are even higher.
Still, it's not impossible to buy a home
after financial difficulties, says Dan Keller, a mortgage banker with
Hometown Lending in Everett, Wash. In fact, Keller says, people who have
cleaned up their credit and are otherwise qualified to get a mortgage
can buy a home as soon as they have outlasted a prescribed waiting
period after the bankruptcy, foreclosure or short sale.
Wait a whileThe waiting period can last one to seven
years, says Kirk Chivas, chief operating officer at First Commerce
Financial in Wixom, Mich. The one-year requirement applies to buyers who
complete a Chapter 13 bankruptcy, have a spotless subsequent credit
history and want to get a new loan insured by the Federal Housing
Administration or guaranteed by the U.S. Department of Veterans Affairs.
The seven-year requirement applies to buyers who experienced a
foreclosure and want to get a new conventional loan that can be sold to
Fannie Mae or Freddie Mac.
In between are a number of two-, three- and four-year timelines based on
similar criteria and other factors such as whether the buyer's previous
mortgage was current at the time of a short sale or the size of the
buyer's new down payment as a percentage of the home's purchase price.
Generally speaking, the waiting periods after a bankruptcy tend to be
more black and white while the waits after a foreclosure or short sale
have more gray areas, Keller says. And in some cases, a waiting period
can be waived or shortened if the buyer's bankruptcy, foreclosure or
short sale was due to extenuating circumstances or a hardship beyond his
control.
Technically, it is possible for a buyer whose prior loan wasn't in
default at the time of a short sale to get a new FHA-insured loan with
no waiting period, Chivas says. But he adds that he's never encountered
anyone in that situation.
Clean credit
Buyers must have very clean or perfect credit histories before they can
buy homes after bankruptcy, foreclosure or short sale. A slip-up as
small as one late credit card payment could disqualify a post-bankruptcy
buyer from some loan programs, even if the waiting period has been
completed, Keller says.
"Bankruptcy is a serious word," he says. "If you do it, it's a
get-out-jail-free card. But once you get out of bankruptcy, you need to
be flawless in your credit. Don't even drop a gum wrapper."
Bing: Perfect credit scoreCredit dings can be difficult
to sort out for buyers who experienced a loan modification or short
sale, in part because, as Chivas says, there's "no consistency" in how
lenders report those events to the credit bureaus. Buyers should review
their credit reports and correct any errors or clarify the circumstances
of adverse items.
Stable employment can be a plus, too, Keller says, noting that some loan
programs are more lenient than others. "If there was a gap," he says,
"it needs to be explained."
Consult a loan proGiven these complexities, buyers are
advised to consult a loan officer or mortgage broker early on for advice
that applies to their situation.
"They may think they're fine, but if they're not talking to a
professional, their hopes can get dashed or crushed," Chivas says.
"That's why you want to speak to someone as soon as you start dreaming
it up in your head" that you want to buy a home after a bankruptcy,
foreclosure or short sale.
