Buying a home after a financial disaster From Kathy Godin

Can I ever buy a home again after a financial disaster (bankruptcy, short sale, foreclosure)?  Millions of Americans ask this question and yes is the answer.

The biggest second question is ‘when?’  Government rules and regulations plus the complex requirements of the mortgage market don’t lend themselves to a one answer fits answer.  Here’s a guideline you can go by:

Rule of Thumb:  Two Years

Of course you will need to build your FICO credit score back up to 640.  I know, some web sites (even government websites) say that lower scores are ok.  I’ve seen FHA sites state they will accept scores as low as 580.  Problem comes when you try to find a lender who will accept 580.  Most common is 640.

Another general rule:  Conventional mortgage requirements stricter than FHA, USDA and VA requirements.  Let’s look at some specifics:

FORECLOSURE

= Conventional: 7 years.  3 years (changing to 4) with extenuating circumstances.

= FHA:  3 years.

= USDA:  3 years.  Lenders can use stricter guidelines.

= VA:  2 years.

BANKRUPTCY Chapter 7

= Conventional: 4 years

= USDA: 3 years.

= FHA: 2 years.

= VA: 2 years.

BANKRUPTCY Chapter 13

= Conventional: 4 years after dismissal or 2 years after discharge.

= USDA: 1 year with court’s permission or 1 year after discharge.

= FHA: 1 year with court’s permission.

= VA: 1 year with court’s permission.

SHORT SALE

= Conventional: 2 years with 20% down & 4 years with 10% down.

= USDA: No seasoning but a 640+ scores.  Lenders can use stricter guidelines.

= FHA: 3 years.  Situation at time of short sale impacts FHA’s approval.  Were you current, delinquent?  Did you just bail out?  FHA also allows lenders to reduce the 3 years when default was due to circumstances beyond borrower’s control.  Examples: death of primary bread winner, long-term uninsured illness, etc.  FHA does not accept divorce here.

= VA: No time requirement when veteran’s credit is good enough to qualify through automated underwriting.

Caveats:

= If the government lost money on any of the above, the situation becomes more complicated.  A VA loan may not be possible if the VA lost money on your previous mortgage for example.

= Bankruptcy almost always requires no late payments at all after you enter.