A guest post by: Matt Baker
It is not uncommon for many Arizonans, and Americans for that matter, to have experienced what I am calling a major credit event. These events can drastically impact your ability to borrow for years to come. However, understanding the lending requirements can put you back in the game and able to buy a home in as little as two years.
In the coming paragraphs I am going to outline the rules for FHA and Conventional loans for people involved in a major credit event. As a general rule, though, FHA loans tend to be more lenient than Conventional loans, in terms of being able to get homeowners back in the market for as little as possible.
Most likely, you are already familiar with what comprises a major credit event. Short sales, home sales settled for less than what you owe, are becoming very popular ways to get out of a house under water. Foreclosures and bankruptcies have always been a part of the lending landscape, but with the current market, are getting a lot more attention recently.
FHA Rules for Life after a Major Credit Event
* Bankruptcy (BK) – Requires two years from the date of BK to the date of a new purchase contract
* Short Sale – Requires three years from the close of escrow date of the short sale to the new contract date
* Foreclosure – Requires three years from the date of the Trustee’s Sale to the date of a new purchase contract
There are a few other key things to be aware of that may impact you in your new purchase venture.
Extenuating circumstances can sometimes allow you to purchase a property a year after a bankruptcy or short sale, but in my experience, very few lenders actually allow this. So, check with me or an experienced mortgage banker to determine what, if any, special extenuating circumstances would be accepted in your case. Next, in some cases, you may have a foreclosure included in a bankruptcy. If this is the case, lenders are going to use the latest date that applies, whichever is worse, to determine how long you must wait to buy another home.
For example, if you start the BK process and have a foreclosure being processed as part of that bankruptcy – bankruptcies usually get processed in approximately six months, while foreclosures usually take a year or more – the date lenders will use to determine your eligibility to buy a new house starts from the date of the Trustee’s Sale, not the Notice of Trustee’s Sale.
I have spoken with many people in Arizona over the last few years, where many banks took one, two, or even three years to process their foreclosure in a BK. This means that, unfortunately, they won’t be allowed to buy again until three years after the Trustee’s Sale, even though their bankruptcies were settled much earlier. I also spoke to one client in California earlier this year, who moved out in 2007, filed for bankruptcy in 2007, but the bank didn’t actually foreclose on him until 2010. He will not be eligible to buy again until 2013.
In my opinion, until Fannie Mae and Freddie Mac reassess or clarify this rule, they are prolonging the recovery by preventing good and honest prospective home buyers from entering the housing market. The rule, I admit when researching it for clients, is very ambiguous. Nevertheless, we are a direct lender to Fannie Mae and FHA, and after getting clarification directly from them, we are stuck with their current interpretation.
Conventional Rules for Life after a Major Credit Event
* Chapter 7 Bankruptcy – Requires four years from the discharge date
* Chapter 13 Bankruptcy – Requires two years from the discharge date
* Short Sale – Requires a 20% down payment only two years after the close of escrow date of the short sale, or a 10% down payment four years after the close of escrow date of the short sale
* Foreclosure – Requires seven years from the date of the Trustee’s Sale to the date of a new purchase contract
As you can see, Fannie Mae and Freddie Mac have more stringent rules in place to qualify for lower down payment Conventional loans. However, clients who can save a 20% down payment can also be back in the market just two years after the date of their short sales. Since credit standards and FICO credit score requirements will still exist, there will still be a few things that need to be confirmed. So, after 15 years of experience in this industry, I suggest talking to a lender at least a year prior to when you hope to buy another home. With that much lead time, we can often help you replace the possible negative credit issues with up-to-date information to reflect better on your credit report.
I council many Phoenix area residents who have recently had a short sale or foreclosure on how to get started in the credit rebuilding process. This insures that, once you are ready to buy again, you can and you will meet the qualifications above. The best way for our economy and housing market to rebound from this downturn is to get you back into the housing market. Therefore, I am dedicated to helping rebuild Arizona’s housing market one client at a time.
Matt Baker (NMLS 190779) helps walk clients through the home buying process. Whether they are ready today or next year, he is committed to helping Arizonans get back into the housing market. Matt is a 15 year mortgage veteran who has worked in all facets of the mortgage business. He is a Partner with the Bookspan Baker team. Learn more about Matt at www.TheB3Team.com or contact him with questions by email at Matt@TheB3Team.com or by phone at 602-522-9494. Please check out www.ApproveMeHomeLoans.com to learn about the pre-approval process.
Image Credit: respres on Flickr. CC Licensed.