Purchasing a home after a short sale, foreclosure or bankruptcy can be very frustrating. There are different rules for each situation and some of the rules depend on the situation. Keeping documentation of what happened is the first key. Make sure you keep anything that may be important and give that to the loan officer when you are ready to buy again.
Keep copies of your divorce decree, bankruptcy documents, any satisfied judgments, lien releases, forclosure papers, etc. If there is an extenuating circumstance for the bankruptcy, foreclosure or short sale, documentation is your best answer. If you had a major medical accident, that may allow you to buy sooner than if you just filed bankruptcy to get out of too much debt.
Below are general guidelines for each situation. Be aware that just because FHA allows you to buy within 3 years of a foreclosure, it doesn't mean that the bank will give you a loan. Many banks have "overlays" that apply on top of the general rules. Some banks require 7 years after a foreclosure whether the new loan is a FHA or a Fannie Mae loan.
Conventional Loan Programs:
- Bankruptcy - 4 years
- Foreclosure - 7 years
- Short sale - 2 to 7 years with loan to value restrictions
The restrictions for short sales vary between Freddie Mac and Fannie Mae (and between banks). Fannie Mae requires:
- 2 year wait if the borrower puts 20 % down
- 4 year wait if the borrower puts between 10% to 20% down
- 7 year wait if the borrower puts less than 10% down
- 2 year wait if the borrower can show extenuating circumstances and puts more than 10% down
Freddie Mac states that you have to wait 5 years after a short sale. Each bank has it's own rules that it follows, so you may have to do some research to see what lender will work for your situation.
FHA Loan programs:
- Bankruptcy - 2 years
- Foreclosure/short sale - 3 years
FHA also says that if you are current on your mortgage, sell your home on a short sale and can show that there are not any lates on the mortgage or other installment debt, you may buy a new home immediately. This is one area where you will have to find a lender that will allow you to purchase immediately, many banks have overlays and will not allow you to purchase even though FHA says it's ok.
VA Loan programs:
- Bankruptcy - 2 years
- Foreclosure/Short sale - 2 years
There are exceptions to VA's rules depending on the circumstances.
Your credit score will also take a hit depending on the situation. How much will vary depending on your own personal credit history. Some people believe that a short sale will not affect your score by much, but it can affect it as much a foreclosure, depending on your history. The average drop in a credit score after a short sale or foreclosure may be anywhere from 85 to 160 points. A late payment on a mortgage may drop your score anywhere from 40 to 110 points.
After going through a foreclosure, short sale or bankruptcy, you will want to re-establish your credit rating. Make sure any debt you have is paid on time. The lender will look at your history before and after a short sale/foreclosure or bankruptcy. You will also probably have to write a letter of explanation for the underwriter. Any documentation you have will help your situation.
Time does heal everything. It may take awhile before you can buy again, but use that time to save money for a down payment and re-establish your credit history.