With the volatility in the housing market in recent years, this is one of the most common questions we receive from borrowers. Many borrowers experienced one of these issues and are now 2-3 years from the date it occurred and are wondering if they will now be able to secure financing to purchase a new home.
The answer to this question can be complex and can depend upon the nature of the incident as well as the type of loan program the borrower is seeking. Following are some general rules:
If you have had a short sale, conventional loan programs will now allow for a borrower to purchase a home within just two years from the date of the short sale, as long as the borrower is putting 20% down. With a 10% down payment, they must wait 4 years, and with less than 10% down 7 years are required.
On an FHA or USDA Rural Housing Loan program, 3 years from the date of sale are required. The VA will also allow a short sale after only 2 years for veterans. There are also new rules under the FHA Back to Work Program which allow for just one year after the event when extenuating circumstances can be shown. These are addressed in a separate blog entitled FHA Back to Work Program.
Borrowers seeking a conventional loan must wait 7 years, while FHA and USDA require 3 years. Once again VA only requires 2 years. New rules applying to foreclosures are also addressed separately in the FHA Back to Work Program.
The bankruptcy rules vary depending upon whether you filed under Chapter 7 or Chapter 13. For a Chapter 7 bankruptcy, conventional guidelines require 4 years from the date of discharge. FHA and VA require two years from discharge and USDA requires 3 years. For a Chapter 13 bankruptcy, Conventional guidelines call for 2 years after date of discharge, while FHA, VA and USDA may allow for a new loan 1 year into the payment plan.
These guidelines may vary by lender as some lenders may implement their own stricter guidelines.
In addition to waiting the designated time after the occurrence of these events, the borrower must also re-establish credit and have acceptable scores under each of these programs. One of the biggest mistakes we see borrowers make is that they avoid using credit, particularly after a bankruptcy, as a means of avoiding any further issues. However, this does not help to re-establish credit, as the lender will look not only at the current scores, but how you have utilized credit since the derogatory incident occurred. The best thing you can do to demonstrate that you are a qualified borrower is to utilize credit and do it wisely and responsibly.