Buying a Home After Bankruptcy, Foreclosure or Short Sale

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Since the financial crisis of 2008, many Americans have endured bankruptcy, foreclosures, short sales or deeds-in-lieu of foreclosure. Now, as the economy and real estate markets start to recover, you may wonder if you can be one of the millions of former homeowners who are becoming homeowners again. This page will show you the challenges you face and how to overcome them.

Waiting Periods After Bankruptcy, Foreclosure and Short Sale

You can't expect to qualify for a home loan immediately after a financial disaster. The waiting period before you can secure a Federal Housing Administration (FHA), VA, Fannie Mae or Freddie Mac home loan after a bankruptcy, foreclosure or short sale varies depending not only how long it takes to repair your credit score and the circumstances that led up to the problem. Lenders want to understand the circumstances behind the failed loan. They view unexpected medical expenses, for example, in a different light than careless credit card spending on clothes, travel and entertainment.

FHA

Event
Waiting Period
Waiting Period With Extenuating Circumstances

Bankruptcy Chapter 7

2 years after discharge date

1 year

Bankruptcy Chapter 13

1 year after start of repayment plan, with court approval

1 year

Foreclosure

3 years

1 year

Short Sale

3 years; No waiting period if borrower was current on payments 12 months before short sale

1 year

Deed-in-Lieu

3 years after date of recorded deed

1 year

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FHA

*As part of the FHA's Back to Work program, reduced waiting periods are available, provided the borrower's household income fell 20 percent or more for at least six months. Be prepared to provide supporting documentation, such as income tax returns, W-2s, verification of employment or pay stubs. You must also participate in housing counseling.

Fannie Mae or Freddie Mac

Event
Waiting Period
Waiting Period With Extenuating Circumstances*

Bankruptcy Chapter 7

4 years; 5 years if multiple bankruptcies on record in last 7 years

2 years; 3 years if multiple bankruptcies on record

Bankruptcy Chapter 13

2 years from discharge date or 4 years from last dismissal date; 5 years if multiple bankruptcies on record in last 7 years

2 years from discharge date or 2 years from last dismissal date; 3 years if multiple bankruptcies on record

Foreclosure

7 years

2 years from discharge date or 2 years from last dismissal date; 3 years if multiple bankruptcies on record

Short Sale

4 years with 5% down payment

2 year

Deed-in-Lieu

4 years with 5% down payment

2 years

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FANNIE MAE OR FREDDIE MAC

*Fannie Mae defines an extenuating circumstance as a nonrecurring event beyond the borrower's control that results in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations. Claiming extenuating circumstances requires you to provide a letter to your loan officer that explains why you had no reasonable alternative other than default. You will need to provide supporting documentation — such as a divorce decree, job layoff notice or medical bills — to back up your explanation.

VA

Event
Waiting Period

Bankruptcy Chapter 7

1 year after start of repayment plan, with court approval; No waiting period if discharged

Bankruptcy Chapter 13

2 years

Foreclosure*

2 years from discharge date or 2 years from last dismissal date; 3 years if multiple bankruptcies on record

Short Sale

2 years; No waiting period if borrower was current on payments 12 months before short sale

Deed-in-Lieu

2 year

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VA

*If the foreclosure was of a VA loan, you must repay the loss before qualifying for another VA loan. The waiting period in this table applies only to foreclosures of non-VA loans.

USDA

Event
Waiting Period
Waiting Period With Extenuating Circumstances

Bankruptcy Chapter 7

3 years after discharge date

2 years

Bankruptcy Chapter 13

3 years

1 year from start of repayment plan

Foreclosure*

3 years

Short Sale**

3 years if FICO score is lower than 640; No set waiting period if above 640, but typically 1 year

Deed-in-lieu

3 years if FICO score is lower than 640; No waiting period if above 640, but typically 1 year

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USDA

*Must not have been a foreclosure of a USDA loan. You cannot qualify for a USDA loan again if the foreclosure was of a USDA loan.

**You cannot qualify for a USDA loan if you had a short sale of your principal residence to take advantage of the depressed market conditions, and you subsequently turned around to purchase another home that was a reasonable distance away and that was similar or better than your short sale property.

According to FICO, a foreclosure is viewed as a single negative credit problem and an isolated incident causes less damage to a credit score than a series of problems. Some experts say that a homeowner can begin to recover from a foreclosure in two years as long as the consumer stays current on all other payment obligations. Lenders tend to believe borrowers who suffered a foreclosure or bankruptcy due to extenuating circumstances, such as divorce, job loss and medical problems, are better credit risks than borrowers whose foreclosure or bankruptcy was self-inflicted.

If you defaulted on several loans — perhaps a car loan as well as a mortgage — it will take longer to heal your credit history and repair your credit score. A home loan after bankruptcy also is more likely to require a longer waiting period. Bankruptcies generally have a greater destructive effect on credit scores because they affect multiple accounts.

Most home lending institutions require minimum periods before a borrower with a history of foreclosure or bankruptcy can apply for another home loan.

The tables above outline the waiting periods for conventional, Fannie Mae, Freddie Mac, FHA, VA and USDA loans. Periods for financing with a conventional loan are the longest. If your problem loan occurred because of extenuating circumstances or the financial hardship you suffered was catastrophic, an FHA, Fannie Mae or Freddie Mac loan may be your best option. For example, you may only need to wait one year after a foreclosure, bankruptcy, short sale or deed in lieu of foreclosure before qualifying for an FHA loan.

A Quick Guide to Foreclosure and Related Terms

Unless you have received a windfall of cash recently, you probably must navigate the standard home lending market to buy another house. The open question for those who suffered a foreclosure, bankruptcy, short sale or deed in lieu of foreclosure is whether the lending system will tolerate a fading financial black eye.

Milestones to Recovery

The road back to homeownership can be challenging and rewarding. Recovery from bankruptcy, foreclosure or short sale is a three-step process.

1.) Understand Your Obstacles
Finding approval for a conventional home mortgage will take time. Once you understand the lending approval process and what lenders want to see in borrowers, you will find the shortest path to a home loan. Keep in mind lenders only make money when they close a loan successfully — lenders want you to overcome your obstacles. This page was created to help you understand your challenges. You've already read about the first challenge — most lending programs make borrowers who experience a bankruptcy, foreclosure, or short sale wait two or three years before they will approve their loans.

2.) Repair Your Credit History and Score
Eventually, your bankruptcy, foreclosure or distressed home sale will fade from your credit report. If you want to overcome the credit damage quickly, you must heal your credit report by building your creditworthiness. See "Refinancing With Bad Credit" to learn more about credit repair.

3.) Explore Alternative Lending Sources
Educate yourself about loan programs that don't require applicants to have a perfect (or any) credit history. Review your lending options with FHA, VA, USDA, Fannie Mae or Freddie Mac programs. Beware scam artists who promise loans on the condition you pay an upfront fee to obtain one.

Foreclosure, Bankruptcy, Short Sale and Your Credit Report

Negative events appear on your credit report for different lengths of time.

Negative Event
Time Event Appears on Your Credit Report

Foreclosure

7 years from the filing date

Chapter 7 Bankruptcy

10 years from the filing date

Chapter 13 Bankruptcy

7 years from the filing date

Short Sale

7 years from the original mortgage delinquency date or 7 years from the date it was reported settled or paid if your payments were never late

The impact of past credit problems fades as time passes — but it can take time. For example, suppose because of a job loss in 2008 and an inability to find a new job, you did not make your monthly payments and defaulted on your mortgage. Your lender foreclosed on the property at the end of 2009 and you lost your home. You had difficulty obtaining any kind of credit in early 2010.

But as time passed from your foreclosure date, you found more creditors willing to extend credit to you. You probably found the rates and fees they charged were higher than those given to other consumers who have no history of foreclosure, bankruptcy or short sale. Six years past the formal foreclosure, you obtain your credit report and notice that your foreclosure still appears on it. If you request another credit report seven years after the filing, the foreclosure should no longer appear.

Seven is the magic number for other types of foreclosures and home lending problems of similar scale. It takes seven years from the original delinquency date for a short sale to fade from your credit report. If your mortgage payments were never late, however, the ticking of the seven-year clock doesn't begin until the short sale is reported settled or paid.

The two types of bankruptcies invoke two types of repercussions. The clock starts ticking on the date of the filing for a Chapter 13 bankruptcy. A Chapter 13 bankruptcy involves a repayment plan, during which period you make regular payments to pay off some of your overall debt. A Chapter 7 bankruptcy filing, in which your non-exempt assets are sold, and creditors paid with the proceeds of that sale, stays on your credit report for up to 10 years.

Bankruptcy, Foreclosure, Short Sale and Your Credit Score

If you want to buy a home despite a bankruptcy or foreclosure on your record, you'll need to clean up your finances. The single most important step is repairing your credit score. Your credit score is your financial lifeblood, a tool that you wield to get a mortgage loan approval. You cannot get a mortgage without a credit score and credit history that proves to lenders that you can be counted on to repay the loan.

As you plot your strategy, first assess the damage to your credit score. That depends on a number of factors, including your credit history before your trouble with homeownership. If you had a high score before the foreclosure, bankruptcy or other negative event, your credit score probably dropped further than those whose scores were always lower. According to FICO, creator of the FICO credit score, a foreclosure or similar event could derail your credit score by 100 points or more.

The damage to your credit score also depends on the type of home loan woes you suffered. According to FICO, a bankruptcy is on average more damaging to your credit score than a foreclosure, short sale or deed in lieu of foreclosure. A short sale or deed in lieu of foreclosure can be just as damaging to your score as a foreclosure; credit reports don't generally differentiate between these types of foreclosure alternatives.

Credit Score Damage Caused By Bankruptcy, Foreclosure, Short Sale

Consumer A
Consumer B
Consumer C

Starting FICO score

680

720

780

FICO score after these events:

Short sale / deed-in-lieu / settlement(no deficiency balance)

610-630

605-625

655-675

Short sale(with deficiency balance)

575-595

570-590

620-640

Foreclosure

575-595

570-590

620-640

Bankruptcy

530-550

525-545

540-560

Source: 2011 Fair Isaac Corp.

Estimated Time for FICO score to Fully Recover

Consumer A
Consumer B
Consumer C

Starting FICO Score

~680

~720

780

FICO score after these events:

30-days late on mortgage

~9 months

~2.5 years

~3 years

90-days late on mortgage

~9 month

~3 years

~7 years

Short sale/ deed-in-lieu /settlement (no deficiency balance)

~3 years

~7 years

~7 years

Short sale (with deficiency balance)

~3 years

~7 years

~7 years

Foreclosure

~3 years

~7 years

~7 years

Bankruptcy

~5 years

~7-10 years

~7-10 years

Source: 2011 Fair Isaac Corp.

7 Steps to Improve Your Credit Score After a Bankruptcy or Foreclosure

Each person's situation is unique. So is each recovery from failed homeownership. Complicated formulas, weighted factors and human judgment all play into the process and explain why it's impossible to forecast how long it will take. Your rate of improvement depends on your credit score before the bankruptcy or foreclosure, how much your score dropped because of the bankruptcy or foreclosure, the amount of new debt you've taken on since then; and how much time has passed since the bankruptcy or foreclosure.

It takes time to rebuild your creditworthiness to the point where lenders will trust you again. You can make the most of that time by adopting these (and other) healthy financial habits:

Fixing your credit is an essential step in getting a home loan after a bankruptcy, foreclosure or short sale. The sooner you start working on improving your score, the closer you'll get to homeownership. However, it's only a single step on your road to recovery if you want to make homeownership a reality again.

Another equally important step is saving for a down payment. Recognizing the widespread effects of the great recession, institutional home financiers Fannie Mae and Freddie Mac have made it easier to purchase a house. Both government-backed mortgage giants dropped the minimum down payment requirement from 5 percent to 3 percent. The new down payment requirement for a loan after bankruptcy or other negative event pivots on a few additional requirements, including a minimum credit score of 620.

Build a Spending and Savings Recovery Plan

As you rebuild your credit, look at your financial situation and assess how much money you need to live on and how much debt you need to repay (if any). Once you determine these amounts, you can come up with a feasible plan to pay your debts and save for your down payment. Perhaps the best way to analyze your situation is to create a monthly budget — not just in your head, but on paper or on your computer.

Creating a visual may help you better analyze your situation. For instance, you may be better able to identify areas of spending that are excessive for your income level. If you can lower your expenses, you can increase the monthly amount devoted to a down payment. To get started, you'll need to calculate your monthly net income and consider the various categories of living expenses outlined below. For each type of expense, assign a monthly amount of money to that category. Pull out your paystubs, checkbook ledger and credit card statements to calculate your income and expense history.

  • Monthly Net Income

    Figure out your monthly net income, which is the remaining income you take home after taxes and payroll deductions. It's the amount on your monthly paycheck, or if you are paid twice a month, the sum of your semimonthly paychecks. Knowing your monthly net income is critical because then you know the maximum amount of your monthly expenses. To start saving for a down payment for a home loan after bankruptcy, for instance, you must have more funds coming into your household than going out.

  • Fixed Expenses

    Your fixed expenses are the recurring monthly expenses that cover basic living expenses. The dollar amount of each fixed expense is set and does not vary from month to month. Fixed expenses can include rent, insurance and car payments.

  • Variable Necessary Expenses

    Your variable necessary expenses are the recurring monthly expenses that you need to live and work, but the amounts change. For example, your grocery bill will change every month, as will your fuel expense. Your utility bills — electricity, water and sewer — are also necessary expenses, but their amounts probably fluctuate.

  • Regular Savings

    Smart financial behavior includes setting aside a portion of your monthly income for savings. A common rule of thumb is to take 10 percent of your monthly net income and deposit it into a savings account each month. If you automatically discount that 10 percent, you'll find that it's easier to keep your hands off that portion. It will also help you avoid impulse buying. You'll be more inclined to stick to your savings plan and save for your down payment.

  • Not-Always Necessary, or, Discretionary Expenses

    Other expenses are more discretionary - in other words, you can spend more on the items that are important to you and less on those you care about less. It's at your discretion, which is why these expenses are discretionary. These expenses typically include haircuts, school supplies, clothing, cable programming, cellphone plans, gifts and entertainment.

  • Budget for Major Expenses

    When you purchase your next home and have an inspection completed on the property, you'll have a good idea of the items and aspects of the house that will need replacement, updating or improvements. You'll have an estimated timeline for when those expenses will pop up. For example, if you purchase a home with a roof that's 25 years old, you'll know that the roof will probably need replacement within the next 10 years. Roof replacement is a major and predictable expense.

  • Emergency Fund

    Reserve the funds you deposit into your emergency fund for emergencies. Build up at least three months' worth of expenses in your emergency fund, although a more risk-averse individual (or a self-employed person) might prefer to keep six months of expenses in the fund. Your emergency fund is your safety net.

When you eventually purchase a new home, your emergency fund is essential for covering the inevitable unplanned house repairs, such as a new roof, new appliances, structural repairs or flood damage. Saving for a down payment gets you through the financing process of a mortgage approval, but saving for an emergency fund can help get you through the downs of homeownership.

You can dip into your emergency fund when life delivers surprises that require repair or replacement, or if you lose a major source of income. If you lose your job, you'll have at least three months to secure a new source of comparable income. If you suffer a medical scare that puts you in the hospital for several weeks, you'll have your emergency fund to defray your living costs and get you through without triggering late payments that could result in another foreclosure or bankruptcy.

The Importance of Savings and Budgeting

The faster you save up for your down payment on a house, the sooner you can start your house-shopping and think about applying for financing. One way to stick with your down payment savings plan is to establish a separate savings account, preferably with the same bank or credit union where you've opened a checking account. When it comes time to make regular deposits into your down payment savings account, you'll find it easy to transfer the funds from your checking account to the savings account.

Continually re-evaluate your income and expenses to see where you can channel more into savings. If, for example, your monthly income increases due to a raise, increase your down payment savings. Establish short- and long-term goals for yourself. For example, commit to eliminating $100 in monthly expenses for six months and devote that cash to your down payment fund.

Plan for predictable extra expenses, such as holidays and birthdays. It's easier to stick with a plan that allows for celebrations and some inexpensive fun. With a common-sense budget, you will be less likely to splurge if you receive a bonus from work or an unexpected tax refund.

Controlling Expenses

With some creativity you'll discover numerous ways to decrease your monthly expenses, especially for variable and discretionary categories. You might even be able to lower your fixed expenses. Here are a five ways to improve your finances.

Cut Your Fuel Bill

Carpool to reduce the number of miles you drive. Maybe you have a work colleague who lives close by. If you have children, arrange a carpool to school or extracurricular activities with neighboring classmates' parents. Combine errands into one trip out around town. Plan routes that shorten distances.

Cut Your Insurance Costs

Ask your insurance agent to scrutinize your rates and perhaps uncover a less expensive policy. Leverage your request by shopping around for a better deal and then asking your current agent to match the competitor's offer.

Cut Your Cellphone Bill

Compare your cellphone data plan with actual usage. Are you regularly left with extra data or minutes that you can't carry over to the next payment period? You can reduce your cellphone charges by changing to a different plan altogether, such as one of the many prepaid plans.

Eliminate Your Cable Bill

Drop premium cable channels and watch your favorite shows and movies using lower-cost alternatives, such as Netflix or Hulu. If you look at your viewing habits perhaps you can become a cable-cutter and ditch your cable provider altogether.

Rent a Room

Capture rental income from an unused bedroom or storage space in your home or garage. Don't forget that rental income invokes its own taxes and related tax requirements

About the Author


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The MoneyGeek editorial team has decades of combined experience in writing and publishing information about how people should manage money and credit. Our editors have worked with numerous publications including The Washington Post, The Daily Business Review, HealthDay, and Time, Inc., and have won numerous journalism awards. Our talented team of contributing writers includes mortgage experts, veteran financial reporters, and award-winning journalists. Learn more about the MoneyGeek team.