Buying a Home After a Short Sale or Foreclosure: Is Recovery Possible?
A short sale or foreclosure can have a negative effect on your credit history. If you've sold your home as a short sale or have experienced a foreclosure in the past, you may have questions about whether you'll be able to buy a home again. Lender requirements vary, so whether you're able to get a mortgage again will depend on how long it's been since your short sale or foreclosure and what kind of loan you're applying for. Your decisions and behaviors after the short sale or foreclosure will also impact whether (and when) you're able to buy a house again. If you would like to buy a home, it's important for you to restore your credit history. Here's what you need to know.
Home Loans After a Short Sale
It's never good for a potential home buyer to have a short sale on their record, but there are things that can be done to lessen the impact when applying for a new mortgage. The circumstances of the sale and what kind of loan the buyer is applying for can have an impact on whether the lender will approve the loan.
A short sale appears as "settled for less than the full balance" on the homeowner's credit history and can cause a 50-point drop in a homeowner's credit score. The drop may be even more (as much as 200 points) if the homeowner fails to make a mortgage payment before the short sale closes. This massive credit score dip can have an impact on the buyer's ability to qualify for a home loan, so it's very important for homeowners who anticipate selling their home as a short sale to continue making mortgage payments.
A home buyer trying to get a conventional loan may be able to do so if they meet the qualifications to get the type of loan that they want. Fannie Mae loans, for example, require the homeowner to wait four years after the short sale before the loan can be approved. Freddie Mac loans may be approved if the loan is for a primary residence with a maximum loan-to-value of 90%. A home buyer trying to get an FHA loan may be able to do so after a three-year wait period.
What to Do After a Short Sale
After a short sale, anyone who would like to eventually buy a home again must take steps to rebuild their credit. Whether the dip in credit they experienced was 50 points or 200 points, the higher their credit is when they apply for a mortgage again, the better the deal they'll get.
Track Your Credit
Credit monitoring apps make tracking credit easy. Most apps will give regular reports about credit score, credit tugs, how many accounts are open and whether unusual activity is detected on any accounts. Tracking credit can be satisfying for people who have experienced a credit dip if their credit goes up over time.
Rebuild Your Credit
Credit rebuilding takes time. To do this, potential home buyers must pay their bills on time, avoid carrying large balances from one month to the next, and limit the number of accounts they apply for. Rebuilding credit can take years after the short sale goes through.
Understand Your Credit Score
People who would like to buy a home should understand their credit score, and they should understand what is a good credit score versus a poor credit score. A score over 700 is best for someone who is trying to buy a home, though people with lower scores may be able to qualify for a mortgage with a higher interest rate. Keeping records of credit history makes it easier to track progress and catch credit-related errors.
Aside from a failure to make mortgage payments before the short sale took place, the biggest potential obstacles are errors on the credit report. A person who would like to purchase a home after a short sale should read through their credit history carefully to ensure that their short sale was not listed a foreclosure.
The potential home buyer should also compare the short sale date on their credit when the title was transferred to the buyer. The date is important, as some loans require the homeowner to wait for a certain period of time before they can qualify. If the date is inaccurate, this could negatively impact the home buyer's ability to get a mortgage when they need one.
Other potential obstacles to getting a mortgage after a short sale include:
- Home buyer does not qualify for the home loan for unrelated reasons.
- Home buyer's lender has qualifications that restrict anyone with a short sale on their record from obtaining a home.
It's important for home buyers to remember that lenders may impose their own restrictions on the loans they administer. Shopping around for the right lender can be helpful.
Home Loans After a Foreclosure
A foreclosure can cause a homeowner's credit score to drop by one hundred points or more. This loss of credit can impact the home buyer's ability to get a home loan. In addition, there is also a waiting period between the period of time when the home is foreclosed upon and the time when the buyer can get another loan. The waiting period can depend on the cause of the foreclosure. The standard waiting period to qualify for a loan after a foreclosure is below:
- USDA loans: 3 years
- Fannie Mae and Freddie Mac: 7 years
- FHA loans: 3 years
- VA loans: 2 years
These standard waiting periods apply if the foreclosure occurred because of circumstances that the homeowner had some ability to control.
Extenuating Circumstances Let You Buy Sooner
Many people who would have been able to make their house payments lost their home during the recession because of circumstances that were outside their control. Because of this, there is a different waiting period for homeowners who have "extenuating circumstances." Home buyers can make their claim to their lender, and if the lender determines that extenuating circumstances did apply, the lender may relax the waiting period for the home buyer.
Below are the waiting periods for home buyers who have a foreclosure in their history and who had "extenuating circumstances":
- USDA: 1 year
- Fannie Mae and Freddie Mac: 3 years with at least 10% down
- VA home loans: 1 year
- FHA loans: 1 year
One thing that home buyers ask when trying to decide whether they qualify for the shorter waiting period is: what qualifies as extenuating circumstances? Loosely defined, extenuating circumstances are circumstances that homeowners could not have predicted or prepared for, and which they had no ability to control. Loss of a job may qualify as an extenuating circumstance, especially if the homeowner did nothing to make the job loss occur. Death of a wage-earning spouse or onset of a debilitating medical condition also counts.
Overwhelming debt and inability to sell the property are unlikely to qualify as extenuating circumstances. Divorce is unlikely to count as an extenuating circumstance, and injuries caused by risky behavior is also unlikely to qualify.
What to Do After a Foreclosure
After a foreclosure, people who want to own a house once again must take control of their financial situation. Poor credit can be an obstacle to getting a mortgage. Repairing credit and developing good financial habits is important.
Pay Down Debt
Many people who have their house foreclosed upon are faced with complex financial troubles. Excessive debt often comes with these troubles. Paying down that debt is one way to repair credit. Homeowners should start by focusing on high-interest debts.
Pay Bills On Time
Paying bills on time is another way to improve credit. Potential buyers who want as much credit as they can for paying their bills on time should ask utility providers to report monthly payments to the credit bureaus. This is one way to get credit for being a responsible bill payer, and can help boost a home buyer's credit score more quickly.
Avoid Taking Out New Loans
Loans can have an impact on a potential home buyer's ability to qualify for a loan. Anyone who would like to get a mortgage should avoid taking out new loans.
Monitor Your Credit Score
It's important for potential home buyers to monitor their credit score to ensure that their foreclosure is accurately recorded on their credit history and to ensure that they are not being dragged down by inaccuracies on their credit history. Anyone who would like to check their credit history for inaccuracies can request a free credit report from the credit tracking companies. These companies have set up a centralized website where consumers can check their credit report once annually.
Future Homeownership Is Possible
If you have gone through a short sale or a foreclosure in the past, you may be able to buy a house again. Don't give up! Your actions throughout your short sale or foreclosure—and your actions after—will have an impact on whether you can qualify, and how long it will take you to qualify. Once you know the next steps after a short sale or foreclosure, you can begin doing what you need to do in order to qualify for a home loan again.
To get started with your home-buying process, begin by speaking with a HUD-approved housing counselor or real estate agent. Your real estate professional can answer your questions and provide guidance as you look for new homes, apply for mortgages and take the next steps to own a home once again.