December 2nd, 2011 11:52 AM by Eileen Denhard
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
Clean creditBuyers 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."
Credit 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.