Mortgage News

Buying After Short Sale Foreclosure or Bankruptcy

March 3rd, 2015 1:45 PM by Anne James



Has a bank turned you down for purchasing due to short sale or foreclosure?You may be eligible or closer than you think!

After a financial hardship like having to short sale your home, it’s important to know that your next home is within reach.

While a short sale will affect your credit score to varying degrees, time heals all credit wounds as long as you make an effort to build good credit, and keep all of your other payments current.
Rebuilding your credit, so that you are confident that you will not have similar challenges is the first step.

The second step to buying a home after a short sale is the “waiting period” required before you would be eligible for a new home mortgage.

Waiting Periods After Short Sale

The waiting period before you are eligible to buy a home after a short sale is determined by the type of financing you are applying for. In some cases, these waiting periods can be reduced with an extenuating circumstances exception.

FHA Insured Financing – If you are buying using a FHA insured loan, the Application Date for your new mortgage must be 3 years from the date that your name was removed from title to the home that was short sold. If the mortgage that was short sold was also a FHA insured mortgage, the waiting period begins from the day the mortgage insurance claim is paid.

VA Guarantee Financing – If you are buying using a VA Guarantee, Veteran benefit home loan, the Application Date for your new mortgage must be 2 years from the date your name was removed from title to the home that was short sold. If the short sold home was also a VA Guarantee loan, the date will start when the Guarantee was paid, and your entitlement may be affected. Under 'exceptional circumstances' the wait period can be reduced to one year.

Conventional Financing – If you are buying using a Conventional loan, the Date of the Credit Report for your new loan must be 4 years from the date that your name was removed from title to the home that was short sold.

USDA Rural Development Loan – If you are buying using a USDA loan, the Date of the Credit Approval for your new loan must be 3 years from the date that your name was removed from title to the home that was short sold.

Extenuating Circumstance Exception

An extenuating circumstances exception is defined differently depending on what type of loan you are applying for.

In my personal experience, FHA financing has the most strict definition of what is a circumstance outside of your control. The only exceptions I have ever seen from FHA is the death of a primary wage earner, or the permanent disability of a primary wage earner, that resulted in a significant loss of income, and ultimately to financial hardship.

Conventional financing describes a seemingly more lenient definition (from Fannie Mae Guidelines):

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include

  • documents that confirm the event
    • such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.; and
  • documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.

The lender must obtain a written explanation from the borrower explaining the relevance of the documentation. The written explanation must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate that the borrower had no reasonable options other than to default on his or her financial obligations.

The written explanation may be in the form of a letter from the borrower, an email from the borrower, or some other form of written documentation provided by the borrower.

Mortgage Included in Bankruptcy

If the mortgage debt was discharged through bankruptcy, Conventional and USDA financing allows you to use the waiting period from the discharge date of the Bankruptcy. That would make your waiting period 4 years for Conventional, and 3 years for USDA. The date of the short sale is not considered.

Working with a Creative Lender

As a direct lender in California, we pride ourselves in being on the cutting edge of creative financing solutions. When I say “creative”, I mean that we know our guidelines, and we know how to fight through the hurdles of complicated situations that others may not have the experience or patience to figure out.

If you would like to explore buying after a bankruptcy, short sale, foreclosure, or deed in lieu of foreclosure, you can either ask questions or leave comments below, shoot me an email directly, or give us a call anytime.

Our phone number go to our cell phones, and we are available when you have a question. Don’t be afraid to leave a message, I promise we will get back to you in a timely manner.


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