Buying After a Short Sale
Question: How Soon Can We Buy a Home After a Short Sale or Foreclosure?
A reader asks: "Can we still get a loan to buy a home after giving the bank a deed-in-lieu of foreclosure? I'm confused on the wait time. I would like to take advantage of today's market, but my bank said that I have to wait 3 years. And I have talked to different mortgage brokers, and one says this and one says that. Can you help us out? How soon can we buy a home again after a foreclosure?"
Answer: Excellent timing on that question regarding the waiting period to buy a home after losing your existing home. Your timing is good because the waiting periods for conventional loans -- the seasoning between the time the foreclosure was completed and when a buyer purchases another home -- has changed. For that, we look to Fannie Mae.
What is Fannie Mae?
The entity that holds great power in the conventional mortgage market is Fannie Mae. Fannie Mae is America's largest mortgage buyer, a quasi-government entity, which buys mortgage loans in the secondary mortgage market. Because Fannie Mae would end up with the properties back if borrowers default, Fannie Mae has a strong interest in setting forth stringent guidelines to lessen the chance a borrower will go into foreclosure.
Fannie Mae revised its guidelines and now addresses separate waiting periods depending on the type of foreclosure.
Moreover, if you have documented extenuating circumstances, this will have a direct bearing on the number of years you will have to wait to get a conventional loan.
What is Documented Extenuating Circumstances?
Fannie Mae allows for extenuating circumstances such as:
- Death (not yours, of course)
- Job Transfer
- Accident Resulting in Severe Injury
Generally, extenuating circumstances are things that happen beyond your control, which dramatically affect your ability to continue making payments on your mortgage.
With documented extenuating circumstances, the waiting period is less than without. I'm sorry to say that being unable to afford an increase in payment due to an interest rate increase on your adjustable-rate mortgage is not considered a circumstance beyond your control.
Waiting Period to Buy After Foreclosure
- Buying After a Foreclosure
The waiting period is 5 years up to 7 years.
- Buying After a Foreclosure With Extenuating Circumstances
The waiting period is 3 years up to 7 years.
- Buying After After a Deed-in-Lieu of Foreclosure
The waiting period is 4 years up to 7 years.
- Buying After a Deed-in-Lieu of Foreclosure With Extenuating Circumstances
The waiting period is 2 years up to 7 years.
- Buying After a Short Sale
The waiting period basically is 2 to 5 years. A few portfolio lenders are lending with 20% down and no waiting period. Moreover, if a seller does not have a 60-day late pay, Fannie Mae says that seller may immediately buy another home but none of the major lenders will fund such a loan, so it's kind of a fallacy. FHA says 3 years, but buyers have to jump through a lot of hoops. I have heard of isolated instances many years ago before the rules changed yet again in which a seller relocated for a job transfer and moved more than a certain distance to qualify to immediately buy a home after a short sale. FHA also has a policy that if the borrower was current and not delinquent, it will allow a loan immediately.
However, to answer your particular question, if you have no extenuating circumstances, you will need to wait four years from the date of completion, meaning the date your deed-in-lieu of foreclosure was recorded.
In addition to the waiting period, some loans require 10% down and a minimum FICO score. The home you purchase must be your principal place of residence, not a rental nor a vacation home.
Fannie Mae constantly issues new guidelines. The above policies are in effect for loan applications submitted after August 1, 2008, revised 2017.
A few loans completed through the HAFA program in which a default has not been filed might allow a short sale to be reported as simply paid in full, which will make it relatively easy to qualify for another home after a short sale. Moreover, some private banks will make portfolio loans the day after a short sale has been completed, providing borrowers qualify.
Ask your short sale agent for more information. Be sure to get prequalified through a reputable local lender.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.