Article updated on August 17, 2018
If you have a short sale or foreclosure on your record, you’re not alone. Short sales represented a whopping 32 percent of home transactions in the United States during their peak in 2012. And the numbers of foreclosures in the midst of the mortgage crisis were downright scary, hitting an all-time high in 2010 with 2.9 million Americans losing their homes in that one year alone.
The good news: the current level of distressed homes 10 years after the housing crisis has vastly diminished. Only 12.5 percent of homes sold last year were foreclosures or short sales. This is almost back to pre-recession levels, or the norm, of single-digit percentages.
Having a short sale or foreclosure in your past isn’t a rarity, nor is it a life sentence. You can be a homeowner again—and sooner than you might think. There’s even a term for people who lost their homes to short sales or foreclosures and who are ready to buy again: boomerang buyers. And the verdict on how well these buyers do with a new mortgage? So far, so good. A study by Experian in 2016 found that most boomerang buyers have been faithfully paying their new mortgages every month and on time. This group of buyers is set to be a big factor in the real estate market moving forward.
Today, the United States housing market is almost in complete recovery since the dark days of the mortgage crisis. To put things in perspective, just prior to 2008, existing homes sold in the United States totaled 6.5 to 7 million. Between 2008 and 2012, though, existing homes sold took a significant nosedive, dropping to around 4 million a year. Ever since 2015, however, existing home sales have consistently been over 5 million, hitting over 5.5 million in 2017. Predictions by Statista, an online statistics portal, forecast more sales increases in the coming two years.
Lenders have been issuing mortgages to people with a short sale or foreclosure on their record for several years now, so if you are ready to buy again, you have several mortgage options available to you through FHA, conventional, and VA loans.
A huge benefit to applying for an FHA loan after having gone through a short sale or foreclosure is the relaxed rules on how long you need to wait—in some cases, no time at all.
FHA loan after a short sale
If you sold your home through a short sale, you might not have to wait at all before applying for an FHA loan. You just need to meet two criteria, which apply to how you handled your prior mortgage. 1) You must have paid all your mortgage payments on time during the 12 months before the short sale. 2) You were not in default on your mortgage when the short sale occurred.
If you don’t meet the criteria to apply right away for an FHA loan, you can still apply for one three years after the date the short sale is complete. If there were extenuating circumstances that caused you to default on your prior mortgage, however, you might not need to wait the three years. If an illness or death of a wage earner caused you to miss some payments, for example, and you are now able to make mortgage payments again and if you have no current dings on your credit report, you might qualify for an FHA loan sooner than three years.
FHA loan after foreclosure
If you lost your home to foreclosure, you must wait three years before applying for an FHA loan. You start counting the three years after your home is sold through the foreclosure proceedings.
Conventional loans, since they are not backed by the government as FHA loans are, typically, more difficult to get, particularly if you have some derogatory instances on your credit report. Right after the mortgage crisis, it was difficult to get a conventional loan if you sold a home through a short sale or lost one due to foreclosure. But now, the requirements have eased.
If you qualify for a conventional loan, which could be a conforming or a non-conforming loan, you typically fare better than with an FHA loan since you will not need to pay private mortgage insurance if you put down at least 20 percent for a down payment. Note that you can still qualify for a conventional loan if you put down less than 20 percent. But in that case, you will need to pay private mortgage insurance until you have 20 percent equity in the home.
Conventional loan after a short sale
You will need to wait four years after a short sale to apply for a conforming loan, a loan backed by Fannie Mae or Freddie Mac. But if there are extenuating circumstances as to the reason you went through the short sale, you might be able to get a conforming loan two years after the short sale is complete.
How long you need to wait before applying for a non-conforming loan varies based on the lender and your circumstances. The waiting period, for example, can depend on how much of a down payment you’ll make or on how much interest you are willing to pay. A non-conforming loan is a conventional loan you get through private lenders that doesn’t meet the qualifications to be backed by Fannie Mae or Freddie Mac.
Conventional loan after a foreclosure
You can get a conventional loan these days after a foreclosure. To get the best interest rate on a conventional loan, however, you might need to wait seven years. But depending on your circumstances and your lender, you might be able to get a mortgage sooner than that.
If a wage earner was laid off or if there was a medical incident, and you can document what happened, you could qualify for a conforming loan in as little as three years after the foreclosure. The key to qualify is to explain your extenuating circumstances. For example, what happened to cause the foreclosure might have been beyond your control, such as if you were the victim of a crime or accident, and now that things are back to normal, you can make your mortgage payments.
Veterans who served on active duty, current members of the armed forces, national guard members, or surviving spouses can qualify for a VA loan, a loan guaranteed by the government that requires no down payment or mortgage insurance premiums to be paid. Qualified borrowers would go through a VA-approved lender to get a VA loan.
The VA puts no restrictions regarding a waiting period for getting a VA loan after a short sale. Whether you will qualify or not depends on the lender.
Regarding foreclosure, the VA requires borrowers to wait two years before applying for a VA loan, a shorter waiting period than for FHA or conventional loans.
Steps to improve your financial picture
Although you can get a mortgage after a short sale or foreclosure, having either one on your credit report lowers your score. When you are ready to apply for a mortgage, the better your credit score and overall credit picture, the better off you’ll be. Here are some steps to help yourself out before you apply.
Use credit, but only about 30 percent of what’s available to you.
Pay all your bills on time.
Concentrate on paying down your debt—the lower your debt-to-income ratio the better. The number to shoot for is 43 percent or lower.
Start saving for a healthy down payment.
Keep a savings account equal to three to six months of your monthly salary.
Just because you experienced a short sale or foreclosure doesn’t mean you will never be able to get a mortgage loan again. You can. How long you must wait to qualify depends on the type of loan you want—FHA, conventional, or VA—and your particular circumstances. It’s true that for several years post mortgage crisis, lenders were reluctant to lend to people with a short sale or foreclosure, but that is no longer the case. If you are ready to be a homeowner again, now is a good time to start looking for a home and to begin arranging financing.
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