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How long do I have to wait after a bankruptcy, short sale or foreclosure before I can buy a home?

Posted August 1st, 2011 in Mortgage Loan Insights

This question of how long one must wait to qualify to buy a home after a bankruptcy, short sale, deed-in-lieu, or foreclosure is one many California homeowners are asking now.

As of August 1, 2011, here are the general guidelines
that FHA, Fannie Mae, Freddie Mac, VA, and USDA provide for these derogatory credit events.

Remember that FHA, Fannie Mae / Freddie Mac, VA, and USDA offer only guidelines on lending after these major credit events, but none of those agencies actually MAKE loans. They are simply the entity that provides guidelines to banks and correspondent lenders for making loans that are insured by the respective agency or for sale to the secondary market. A bank or lender making the loan may or may NOT adhere to these guidelines to the letter. A lender’s individual guidelines as they apply to those of the agency determining insurable loans or marketability are known as lender “overlays”. Thus, qualifying for financing after a Bankruptcy, short sale, foreclosure or deed-in-lieu is ultimately up to the bank or lender you’re applying with – not FHA, Fannie/Freddie, VA, or USDA.

Likewise, portfolio lenders — those that make and service the loans they offer without government guidelines or concerns for the secondary markets — make their own rules as to how long you must wait after any of these derogatory credit events before you may re-qualify for a new loan. These include private banks and credit unions. Don’t expect these lenders to stray too far from the government norms, however. Most, in fact, are even more conservative and have longer lockout terms — particularly in the super jumbo loan arena.

FHA-INSURED LOANS

FHA loan with previous Short Sale

* Can purchase right away IF no late mortgage payments or payment default prior to the actual short sale date, AND the new property is in an entirely different market area of substantial distance (such as several counties away, or northern CA to southern CA, or another state entirely) than the previously short-sold property. Otherwise, a 3-year lockout applies. The allowance for new financing to someone with no late payments on a prior short-sold property is predicated on the idea that the previous short sale was due to a verifiable, forced circumstance, such as a job transfer, as opposed to a “strategic” or voluntary short sale.
* 3 year wait if there were late payments or a default at the closing of the short sale
* Reduced wait if the borrower has re-established good credit and can show extenuating circumstances for the short sale (extenuating circumstances include death of a spouse or chronic, long-term documented illness to an uninsured person, and are the only two circumstances that will qualify. Loss of job or other reasons — you’ll need to wait 3 years.)

FHA loan with previous Chapter 7 Bankruptcy

2 years from DISCHARGE DATE with reestablished credit, no late payments on any credit following the discharge of the bankruptcy

FHA loan with Chapter 13 Bankruptcy

FHA rules “say” that someone still in a Chapter 13 BK may requalify for a new loan prior to discharge (assuming a minimum payment history, no late payments, “good” credit, court trustee approval, and other requirements), but we’re not aware of any conventional lender out there in 2012 offering to finance someone still in a Chapter 13 BK. Thus, the same 2-year minimum term from the DISCHARGE DATE with reestablished credit, no late payments on any credit following the discharge of the bankruptcy is the standard most lenders actually follow in these regards.

FHA Loan with previous Foreclosure or Deed-In-Lieu of Foreclosure

3 year wait before being able to re-qualify
Reduced wait if the borrower can show extenuating circumstances and re-establishes good credit (extenuating circumstances include death of a spouse or chronic, long-term documented illness to an uninsured person, and are the only two circumstances that will qualify. Loss of job or other reasons — you’ll need to wait 3 years.)

FANNIE MAE / FREDDIE MAC (what’s known as “conventional” financing)

Fannie Mae (conventional) loan with previous Short Sale

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 (conventional) Loan with Previous Short Sale

4 year wait before being able to get a loan
2 year wait if the borrower can show extenuating circumstances (extenuating circumstances include death of a spouse or chronic, long-term documented illness to an uninsured person, and are the only two circumstances that will qualify. Loss of job or other reasons — you’ll need to wait 3 years.)

Fannie Mae loan with previous Foreclosure

7 year wait from the completed foreclosure sale date
3 year wait if the borrower can show extenuating circumstances (extenuating circumstances include death of a spouse or chronic, long-term documented illness to an uninsured person, and are the only two circumstances that will qualify. Loss of job or other reasons — you’ll need to wait 3 years.)
Additional underwriting requirements apply after a 3 year waiting period.
7 year wait for transactions involving second homes, cash-out refinancing, or investment property

Freddie Mac Loan with previous Foreclosure

5 year wait from the completed foreclosure sale date
3 year wait if the borrower can show extenuating circumstances (extenuating circumstances include death of a spouse or chronic, long-term documented illness to an uninsured person, and are the only two circumstances that will qualify. Loss of job or other reasons — you’ll need to wait 3 years.)

A “Deed In Lieu of Foreclosure” follows the same guidelines as FHA’s foreclosure policy, and the same as Fannie Mae and Freddie Macs short sale policy though the majority of banks and lenders consider any deed-in-lieu as the equivalent of a foreclosure.

FANNIE / FREDDIE LOAN AFTER BANKRUPTCY

Chapter 7: 4 years from date of DISCHARGE
Chapter 13: 2 years from date of DISCHARGE, or 4 years from DISMISSAL date

VA — VETERANS HOME LOAN AFTER BANKRUPTCY

Chapter 7: 2 years from date of DISCHARGE
Chapter 13: 2 years from date of DISCHARGE (but check with a VA-approved lender if you are still in the Chap. 13)

USDA (Rural) LOAN AFTER BANKRUPTCY

Chapter 7: 2 years from date of DISCHARGE
Chapter 13: 2 years from date of DISCHARGE (but check with a USDA-approved lender if you are still in the Chap. 13 for exceptions)

A NOTE ABOUT INCLUDING AND DISCHARGING A HOME IN A BANKRUPTCY PROCEEDING

A home discharged in a bankruptcy is treated by mortgage lenders as a foreclosure, even if there were no late payments. Even if you reaffirm the debt and there are no late payments. Foreclosure lockout policy applies when a home was previously discharged in a BK.

Options for purchasing or refinancing a home before the “waiting period” is up:

A hard money loan is an option, but you should know the following about financing a primary residence following a short sale, foreclosure, or bankruptcy with a hard money loan:

1) You will need a substantial cash down payment — 35% – 50% plus closing costs, depending on the location of the property and other factors. Hard money lending is equity-based lending, and that’s the opposite of the low-down-payment programs like FHA, VA, and Fannie / Freddie loans. In addition to the down payment, points are charged by the lender (3% – 5.5%) as well as routine closing costs (escrow, title insurance, appraisal, etc). And in case you’re thinking about buying a “bargain priced” home at under-market value — you’ll still need cash equity in the transaction. Such is the nature of subprime lending in California.

2) The interest rate for a hard money loan will be twice or more compared to conventional loan rates (figure 9% – 12%). For primary residence transactions, this payment MUST be fully amortized over 30 years (no “interest-only” payments), and must have a minimum due date of 5 or 7 years. This is a provision of Federal and California state law post 2008.

2) Unless the transaction meets certain exemptions (described below), a purchase loan for a primary residence is considered a “covered, consumer transaction”. This means that you MUST be able to document sufficient income to qualify for a fully amortized loan with pay stubs, tax returns, dividend statements, SSI / Disability income, etc, just as you would with a traditional loan from a bank, and your debt-income ratio must not exceed 50% of your total debt, including the new home loan + taxes and insurance. Again, the “ability to repay” standard is one implemented by Federal and State legislators. Bottom line: there are no more “stated income” hard money loans allowed on covered, consumer real estate transactions regardless of the equity in the home. Hard money lenders who advertise loans on owner-occupied, primary residences cannot claim to make “stated income” loans for covered, consumer finance transactions, so don’t be fooled by misleading statements to that effect.

There ARE two exceptions to the provisions of hard money purchase lending for primary residence transactions which allow for interest-only payments and no debt-income ratio restrictions, but these must be documented and verifiable prior to closing:

1) title to the property will be vested in a non-natural-person (LLC, Corporation, LLP, or NON-revocable trust). The buyer must be a primary party to the entity in which title is vested if the property will be a primary residence.

2) certain construction and renovation loans made with a 12-month balloon term or less, and in which other conventional, permanent financing will refinance the hard money loan at completion of the project.

We provide hard money financing for owner-occupied primary residence transactions in California only. Our minimum loan amount for a consumer loan is $150,000, and our maximum loan-to-value ratios vary by location of the property. Call me today for more information — (800) 644-8829. Also see my companion article here.

There is no “right” or “wrong” loan for someone following a short sale, foreclosure, or bankruptcy. The decision to repurchase a home with an alternative financing source like hard money has to consider one’s available cash, income, and reserves to meet the increased overhead that private financing involves. It’s not for everyone, and it’s not for those looking for a cheap alternative. It’s one of the most expensive propositions available, but for those with the means and a desire to buy sooner rather than later, it can be a viable, short-term solution.

Call now for a free no-obligation home loan consultation:
Valencia / Santa Clarita / Los Angeles: (661) 255-9824 | Toll-Free: 1 (800) 644-8829   Inquire Online  
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Disclaimer: The advice and opinions expressed herein do not constitute legal advice and are intended for general informational purposes only based on the working experience of the author only. The author is not a licensed attorney. The opinions contained herein are made exclusively by the author and not those of Augusta Financial Inc, it's ownership, management, or other employees. No guarantees as to the validity or legal aspects of the information contained herein are made, express or implied. Accuracy of this information is subject to change per market conditions or the author's experience in the industry. No guarantees are expressed or implied as to the viability of real estate as an investment. Personal credit issues are subjective. Real estate, finance, investment, and landlord-tenant laws and regulations vary state-by-state. You should consult with a licensed real estate attorney in your area for all matters pertaining to the legal aspects of selling, purchasing, financing, investing in, or rental of real estate whenever legal and/or financial implications are (or should be) a consideration. Page copy protected against web site content infringement by Copyscape
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