Buying a Home After Short Sale or Foreclosure
As a Mortgage Banker who has been heavily involved in closing short sales over the last five years, one of the questions that I get asked quite often from home sellers is how long will it take before I will be able to buy a home again.
The answer to this question does not have any clear cut and dry answer. There are quite a few variables involved when trying to figure out when someone will be able to purchase a home after a foreclosure or short sale.
Going through either a short sale or a foreclosure has the potential to seriously impact ones credit. Government entities Fannie Mae, Freddie Mac and FHA do not directly loan money to individuals but are the governing body that work with lenders to guarantee loans and free up money to provide mortgages.
Banks typically have the authority to lend to whoever they want but will generally follow the guidelines set forth by these entities. There are some lenders of course that will take greater risks with some borrowers than others.
Below are the general guidelines that FHA, Fannie Mae and Freddie Mac follow when considering a loan after a short sale or foreclosure:
Short sale with FHA Loan
- Can purchase right away with no mortgage default
- 3 year wait if in default at the closing
- Reduced wait if the borrower has re-established good credit and can show extenuating circumstances
Short Sale With Fannie Mae Loan
- 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% dow
Short Sale with Freddie Mac Loan
- 4 year wait before being able to get a loan
- 2 year wait if the borrower can show extenuating circumstances
Foreclosure with an FHA Loan
- 3 year wait before being able to get a loan
- Reduced wait if the borrower can show extenuating circumstances and re-establishes good credit
Foreclosure with a Fannie Mae Loan
- 7 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances. Additional underwriting requirements apply for 4 years after a 3 year waiting period.
- 7 year wait for a 2nd home, cash out re-financing, or an investment property
Foreclosure with a Freddie Mac Loan
- 5 year wait from the completed foreclosure sale date
- 3 year wait if the borrower can show extenuating circumstances
** As a side note a deed in lieu of foreclosure follows the same guidelines as FHA’s foreclosure policy, the same as Fannie Mae and Freddie Macs short sale policy.
When analyzing the difference between completing a short sale or going through a foreclosure in regards to purchasing another property in the future it boils down to the waiting time which is more favorable in a short sale.
Credit Scoring After Short Sale and Foreclosure
The other question that I get from people considering a short sale is how it will impact their credit. There is a lot of misleading information that come from Realtors, as well as online forums about the impact on Credit Score.. On many occasions you will hear that a short sale is far better for your credit than getting foreclosed on. This is incorrect! A Credit Score. in a short sale or a foreclosure have the potential to be about the same. Maybe marginally better in a short sale.
According to Fair Issac (www.MyFICO.com) a company that provides analytic, decision making and Credit Scoring services for financial service companies a Credit Score will go down by 40 to 110 points after being 30 days late. Further, the scoring drop will increase to 70 to 135 points after 90 days late on a mortgage payment.
The average scoring drop in a short sale, foreclosure or deed in lieu is 85 to 160 points. You need to keep in mind that in both short sales and foreclosure it is possible that the Credit Score drop could be closer to 200-300 points.
Credit Scoring factors vary from individual to individual. The scoring change is heavily dependent on where the credit score was before the negative event took place. Both a short sale and foreclosure are considered a loan that was not paid as agreed.
What happens to your Credit Score in each of these events could be different than someone else who goes through the same financial event. Unfortunately, most of the time the higher the Credit Score the greater the decrease from where you started.
When trying to decide whether a short sale is right for you don’t be fooled into making the decision under false hopes that your credit will not be impacted all that much. The biggest advantage in a short sale is the shortened time frame in which you will be able to purchase a home in the future.
One of the most important steps after going through either a short sale or foreclosure is to be conscious about trying to improve your credit standing.
*** The above information for waiting periods before buying a home after completing a short sale and foreclosure was sourced by theFannie Mae Selling Guide and Freddie Mac selling guides along with the FHA handbook.
Also go to: www.YourCreditRepairCompany.com for more information concerning your credit or to start the 90 credit make over program.