Lots of families who lost their homes are eager to get back into the housing market. Here’s the scoop on time frames and reestablishing credit to help make yourself eligible to qualify for a mortgage in today’s lending climate.
Foreclosure is the taking back of a home by the bank after the owner missed a series of payments and was not able to make the loan current. Sometimes foreclosure can be avoided by means of doing a “short sale”, in which the lending bank will take less than the full balance owing if the owner can sell the house.
Both practices have become much more commonplace since 2009. Part of a home owner’s dilemma had been which path to take, considering the future credit ramifications of each.
For home loan qualification today, “a short sale will be viewed the same as a foreclosure.”
What does all this mean to consumers? Forget whatever lending guidelines you remember from the past, and if you have had a short sale or foreclosure – Keep checking with your mortgage professional, because the rules continue to evolve. For today, Fannie Mae and Freddie Mac mandate seven years from the date of the foreclosure or short sale before they will do a conventional loan with 5% down. There are exemptions available two years after a short sale, but the details are very restrictive and not all lenders will write those loans.
FHA, VA, and USDA want three years beyond the foreclosure or short sale before they will do a new loan. The fine print says FHA may consider doing a loan two years later, but there must be documented extenuating circumstances. The bar is set pretty high: Unemployment, prolonged strikes, or medical bills not covered by insurance might make the grade. However, Divorce is not generally viewed as beyond the control of the borrower and would not be considered an extenuating circumstance.
Here is a key feature of all re-entry loans, and one that should not be overlooked. The consumer should have established new credit after the end of the short sale or foreclosure. Guidelines suggest that three or four new accounts, with between 12 and 24 months perfect payment history, will be needed in addition to the wait time.
Lending after losing your house is still possible, if you plan for it. Just be really certain that your credit profile (and your down payment, and your job history) after the event is squeaky clean when you do go to apply for your next home loan.