If you lost your home during the housing recession — and have not completely soured on homeownership — your ability to qualify for another mortgage may not be as compromised as you think.
It used to be that a bankruptcy, foreclosure or other major black mark on your credit record meant you could not hope to obtain financing to buy another house for seven years. Now, for the most part, the rules say you must wait just three years. Depending on the reason you lost your house, the wait could be even shorter.
Although financial difficulties remain part of your record forever, you can qualify for a mortgage as soon as 24 months after the fact if your issues were the result of "extenuating circumstances" over which you had no control.
These are "life-changing events that made it impossible" to continue making payments, explains Matt Kovach, product development manager at Envoy Mortgage in Houston. Job loss counts as such a circumstance, as does serious illness or the death of a wage earner. But divorce isn't considered a life event, at least not by lenders. Neither is a business failure or the fact that you were simply overwhelmed by too much credit.
Even if you suffered through a life event, you won't automatically qualify for a new loan after the required waiting period expires. You also have to demonstrate that you can handle credit and afford the payments.
"You need an extremely clean credit history after a significant derogatory event," Kovach says. "Poor credit is not a good indication you've learned from your mistakes."
One of the biggest missteps made by people who have had major credit issues is to close all their accounts and trade only in cash. While the idea seems sensible, especially if you fear finding yourself in the same difficulties again, you need to redevelop a good payment history to obtain a mortgage.
"There's nothing wrong with a cash-only mentality, but it makes it more difficult to qualify," Kovach says. "It's possible to develop an alternative credit report using your rent payments, utility bills and cellphone payments. But most lenders want to see trade lines and a credit score."
Within those parameters, the length of time that rebound buyers have to wait to obtain financing depends on the mortgage they are seeking. Generally, the wait is shorter with government-backed financing.
Take mortgages insured by the Department of Veterans Affairs, for example. Since the VA's rules do not specifically address short sales, it could be possible to obtain a VA-insured loan immediately after selling your house for less than the amount you owe on it. But as noted, you first will have to re-establish credit and then keep your nose clean.
If you declared bankruptcy under Chapter 13, the minimum wait for VA financing is just 12 months, as long as the bankruptcy trustee approves. If you declared a Chapter 7 bankruptcy, the wait is usually 24 months, but it could be shorter with extenuating circumstances. It's the same two-year wait if you went through a foreclosure or handed the lender your deed in lieu of a foreclosure.
Since VA loans are only for armed forces veterans and service personnel, most people who have suffered a major financial setback look for loans with low down payments insured by the Federal Housing Administration.
The FHA has essentially the same rules as the VA regarding bankruptcies — at least one year for Chapter 13 and two (or less) for Chapter 7. However, the wait is at least three years if you went through a short sale or foreclosure, or if you handed the keys back to your lender to avoid a foreclosure. If there were documentable extenuating circumstances, the waits could be shorter.
For conventional loans — these days, that essentially means mortgages purchased by either Fannie Mae or Freddie Mac — the waiting times are tiered.
For example, borrowers who suffered a life event must re-establish credit for 24 months after a short sale, a Freddie Mac spokesman says. If there are no extenuating circumstances, that kicks it up to 48 months.
Here's what Freddie Mac's guidelines say when the borrower's financial issues were due to his mismanagement: An acceptable credit reputation must be re-established for at least 84 months if he was foreclosed upon, 60 months if he filed more than one bankruptcy petition in the past seven years, 48 months after the discharge or dismissal of a Chapter 7 bankruptcy, and 48 months after conveyance of a deed in lieu of foreclosure or a short payoff related to a delinquent mortgage.
The wait also is 48 months for all other significant adverse or derogatory credit information. But it is just 24 months from the discharge date of a Chapter 13 bankruptcy.
If extenuating circumstances can be shown, and if there is evidence on the credit report that the borrower has re-established an acceptable credit reputation, he still will have to wait 36 months if he went through a foreclosure or filed more than one bankruptcy petition in the past seven years.
But the wait is just 24 months if his bankruptcy was discharged or dismissed, if he went through a short sale or deed-in-lieu, or if he suffered another significant adverse or derogatory credit event.