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.

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

*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.

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

*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.

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

*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.

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

*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

Bankruptcy

The homeowner owes more to lenders of all sorts than he can pay. This might include mortgage as well as auto, student loan, credit card and other types of debt. Bankruptcy either creates a repayment plan or wipes out most debts along with the creditor’s assets. Essentially, most people who have gone through bankruptcy have to start over.

Deed in Lieu of Foreclosure

The homeowner gives the property deed back to the mortgage lender to avoid a foreclosure. The lender then owns the house and the former owner might continue living it, start paying rent, or move out.

Foreclosure

The homeowner cannot or does not pay the mortgage, and the lender exercises its legal right to take over the property and sell it to regain its investment. Typically the former homeowner is evicted.

Short Sale

The home is worth less than the outstanding home loan. With the lender’s agreement, the owner sells the house, and the lender takes what it can to settle the debt.

Underwater

The house is worth less than the loans against it (which can include both the mortgage and home equity loans). If a house is underwater, the homeowner can continue to live in it and pay the mortgage in hopes that the home will regain value, boosting it back above water.

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.

he 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:

1Step 1: Pay Your Bills on Time

A homeowner who consistently paid bills on time before experiencing a bankruptcy or foreclosure more than likely had a high score before the negative event. Accounting for 35 percent of your FICO credit score, payment history constitutes the largest factor in the score. It makes sense that consistently paying bills on time will boost your score. The reverse is also true: Late payments drag your FICO score down.

What to Do

Lenders want to see a pattern of consistent payments. Demonstrate regular, on-time payments and your score will rise relatively quickly. To stay on top of your payments, enlist the help of your computer or smartphone by setting up payment reminders on a calendar app, or use your lenders’ auto-payment features.

2Step 2: Keep Your Credit Card Balances Low

The amount you owe to creditors is the second-largest factor in your FICO score. Accounting for 30 percent of your score, your outstanding debt may prove easier to clean up than your payment history. A large amount of debt can depress your credit score, so whittling away the amount you owe is key to improving your score.

What To Do

First, avoid adding to your outstanding balance. If you’ve recently come out of a bankruptcy, don’t load up on the credit offers you will find stuffing your mailboxes, both virtual and real. Pay off any debt the court orders you to pay, and do not pay discharged debt. If you had a foreclosure or short sale, work on paying down any debt you owe. Avoid the temptation to game the system by rolling debt from one credit card to another.

Second, understand the implications of credit-related decisions before opening, closing, or asking for a boost to your available balance. For example, don’t close any credit card accounts in an attempt to raise your score. This tactic usually backfires because having fewer open accounts can lower your credit score. Recently closed accounts will continue to show up on a credit report, and FICO. may include them in your FICO score calculations. Moreover, the same amount of debt spread over fewer accounts means that you are using more of your remaining line of credit; and that’s a red flag to lenders.

Third, opening a new credit card account will not nudge up your credit score, and may in fact lower your it. The smartest action is to pay off your current accounts to lower your credit utilization ratio.

3Step 3: Understand How Credit History Impacts Your FICO Score

The length of your credit history accounts for 15 percent of your FICO score. The longer the history, the better for your score.

What to Do

Keep your oldest credit card accounts open! Keep your accounts open and active to show you have been a reliable account holder for a long time. You can get a complete overview of your opened accounts by requesting free credit reports from the three main consumer credit reporting agencies (CRAs), which are Equifax, Experian and TransUnion. Remember the CRAs are competitors, and may collect and report different information about you.

4Step 5: Avoid Opening New Accounts

New account activity makes up 10 percent of your FICO credit score. FICO logic considers opening several new credit accounts in a short period as higher-risk activity. Try not to do this, especially if you don’t have a long credit history. If your credit history is not extensive, avoid the temptation to open a slew of new accounts quickly. Newly opened accounts lower the average age of your accounts, which in turn lowers your credit score. The impression that this behavior leaves is that of a risky borrower.

What to Do

Don’t apply for credit you don’t need. Avoid opening new accounts just to create more account diversity; this tactic will likely not raise your score. If you do apply for credit, conduct your rate shopping for a given loan within a short period. It may be too soon to start rate shopping for a home loan, but if you do, confine your inquiries to a 30-day period. FICO makes a distinction between a search for a single loan and a search for many credit lines; it does so partly by looking at the length of time over which inquiries occur.

5Step 4: Diversify Your Credit Account Types

The diversity of your credit accounts represents 10 percent of a FICO score. The FICO formulas reward you for having different kinds of accounts. For example, a consumer with a car loan, student loan and credit card is at lower risk of default than someone who has three credit cards and no car or student loans.

What to Do

Diversity is a strength when calculating FICO scores. If, for example, you recently underwent a foreclosure and you have some funds to pay off some loans, you might want to pay off one of your four credit card balances rather than a student loan or car loan.

6Step 6: Check Your Credit Report for Errors

A critical part of rehabilitating your credit score is checking your credit report for inaccuracies. According to the Federal Trade Commission (FTC), about 20 percent of all credit reports contain errors, and 5 percent of consumers have errors on their reports that could result in less-favorable loan terms. Errors enter the system through clerical error, incorrect data entry of Social Security numbers or names, incomplete information, inclusion of information about another individual with a similar name, and the application of a payment to the wrong account.

What to Do

Request free copies of your credit reports through AnnualCreditReport.com, the website created by Experian, Equifax and TransUnion, the three largest CRAs. If you find errors, contact the offending CRA or CRAs, and request the change. It’s essential to correct any errors if you hope to finance the purchase of a new home in the future. You will likely be asked to provide documentation to prove there was a bona fide error and to prove that the new information is a valid correction.

7Step 7: Avoid the ‘Credit Repair’ Temptation

There is no quick fix to improve your FICO credit score. No matter what a credit repair company might claim, the negative information — including a foreclosure or bankruptcy — on your credit report stays on your report for a set amount of time.

What to Do

Avoid two common credit repair scams. The first scam is a promise to wipe negative information from your report prematurely. If your goal is to buy a home after a short sale, foreclosure or bankruptcy, taking the longer, disciplined route means staying away from too-good-to-be-true offers.

Second, beware claims you can boost your credit score by linking an unrelated individual’s good credit to yours. FICO views the practice of linking to an unrelated person’s score — called “piggybacking” — as manipulation. Its latest FICO scoring model eliminates a credit score benefit by piggybacking on someone unrelated to you. Piggybacking services are costly and will ultimately prove to be of little benefit to getting a home loan after bankruptcy or foreclosure, so you’re better off avoiding it.

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.

What You Can Do

Consider working a part-time job to supplement your income. Talk to your manager to learn what you can do to increase your existing salary. Review your options to change jobs to attain a higher salary.

  • 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.

    What You Can Do

    See the Controlling Expenses section below for ideas to control expenses.

  • 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.

    What You Can Do

    See The Importance of Savings and Budgeting section below for ideas to save regularly.

  • 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.

    What You Can Do

    Plan for major expenses. You may have an emergency fund, but you can plan for foreseeable expenses. Don’t rely on your emergency fund for foreseeable improvements and maintenance.

  • 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.

    What You Can Do

    See the Controlling Expenses section below for ideas to control expenses.

  • 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.

    What You Can Do

    See the Controlling Expenses section below for ideas to control expenses.

  • 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.

    What You Can Do

    Because you’re setting aside at least three months’ worth of expenses, you’ll want to make the most of it by depositing it into an interest-earning account at an FDIC-insured financial institution. Your emergency fund should be accessible, and it should make some money for you. For it to be accessible, you should not put it in accounts that charge penalties for early withdrawals.

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