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Boomerang buyers return – qualifying after foreclosure or short sale

Homes

There is homeownership after a foreclosure or short sale. Home owners, who lost their homes to foreclosure or short sale during the housing downturn and recession, are apparently returning to the housing market in increasing numbers, such that their home buying activity is attracting economists’ attention.

Ken Fears, the National Association of Realtors® Director of Regional Economics and Housing Finance, wrote for the NAR Economist’s Outlook Blog (Return Buyers Prefer Safe, Affordable Financing; economistsoutlook.blogs.realtor.org; June 25, 2015) about the research and numbers associated with home buyers who previously lost a home. These “boomerang buyers” accounted for about 8% of home sales during 2014. Considering that there were about 9.3 million home owners who lost their homes between 2006 and 2014, the estimated 350,000 boomerang home buyer sales during 2014 may be just the beginning of the “homecoming.”

If you are a boomerang buyer, there may be a home in your future. Conventional, FHA, and VA mortgage underwriting guidelines have typically allowed for foreclosure, short sale, or bankruptcy with re-established credit and a waiting period. However, easing mortgage requirements may make it easier for you to qualify for a mortgage.

Fannie Mae underwritting guidelines (fanniemae.com) require you to wait at least seven years after a foreclosure, which is typically measured from the reported foreclosure completion date. If you had a short sale, the waiting period is four years. However, if you had a bankruptcy, you’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed). However, if you had multiple bankruptcies within a seven year period, a five year waiting period from the most recent discharge or dismissal date is required.

FHA (hud.gov) has changed significantly in recent years. Besides reducing waiting periods due to extenuating circumstances, there are various caveats that may further reduce your waiting period. Nevertheless, the typical waiting periods include: three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year if you are current on a chapter 13 payment plan. The waiting period after a short sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage without waiting; however if the loan was in default prior to short sale, you will have to wait three years.

If you are eligible for VA financing (benefits.va.gov), you will have to wait two years after a foreclosure, short sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short sale was on a VA mortgage, then your eligibility amount may be reduced.

Waiting periods may be significantly reduced if you can document that your foreclosure, bankruptcy, or short sale resulted from extenuating circumstances. However, such applications are subject to underwriter discretion; and not all lenders grant such exemptions.

If you are a boomerang home buyer, it is crucial that you consult with a lender before embarking on the home buying process. Besides guidance on mortgage eligibility, your lender can help you determine the appropriate mortgage for your circumstances. And as your lender will tell you, timelines and qualifying requirements are subject to change.

By Dan Krell
Copyright © 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Buying a home after a foreclosure or shortsale

by Dan Krell
© 2012
DanKrell.com

If you’ve been through tough financial times, you know that it feels as if your financial picture may never improve. But for most people, experiencing a financial challenge turns out to be just a blip in time; they eventually move on with their life. Given that notion, mortgage lenders know that people endure temporary financial problems through their lives- underwriting guidelines may allow for a past foreclosure, short-sale, or even bankruptcy.

In the old days (prior to desktop underwriting), underwriting was “manual,” meaning that a loan’s approval or denial was decided by a human who reviewed your file. If you were lucky enough to borrow from the local small neighborhood lender, there was a very good chance they knew you, your family, and your financial circumstances (much like the Bailey Building and Loan from “It’s a Wonderful Life”); you had a chance to provide explanations and compensating factors to increase your chance of being approved.

Today, mortgage underwriting is mostly accomplished through automated systems, such as “Desktop Underwriter” and “Loan Prospector.” The automated systems make decisions based on algorithms and do not have the ability to weigh circumstances for negative reports on a credit history. Some lenders may still provide manual underwriting, but borrower requirements have become increasingly strict (including higher minimum credit scores).

Take heart; you still may be able to get a mortgage after a foreclosure, short-sale, or bankruptcy.

For conventional mortgages underwritten with Fannie Mae guidelines, you’ll have to wait at least seven years after a foreclosure. Likewise, you’ll have to wait seven years after a short-sale- unless you can muster a large downpayment (you may be able to qualify: after two years with a 20% downpayment; and four years with a 10% downpayment)! You’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed).

For FHA mortgages, you’ll have to wait at least three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year current on a chapter 13 payment plan (with court approval). A short-sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short-sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage; however if the loan was in default prior to short-sale, you will have to wait at least three years before you can qualify.

If you are eligible for VA financing, you will have to wait two years after a foreclosure, short-sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short-sale was on a VA mortgage, then your eligibility may be reduced.

If you’re financial issues were caused by circumstances beyond your control, you may be able to get an exception that could shorten the waiting periods. However, you’ll have to provide documentation for the underwriter to review, and not all lenders grant such exemptions.

There are many different mortgage programs, and underwriting guidelines vary. The timelines and requirements posted here are as of time of article; it’s very possible that these guidelines will or have changed. It’s important to talk to a licensed loan officer to know what you need to qualify, as well as which mortgage program will be best for your particular circumstances.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 9, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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