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Tips For Homebuyers: Borrowing After Bankruptcy And Other Financial Setbacks

The collapse of the housing market in 2006 drove many people to short sales, foreclosures and bankruptcy, causing them to lose their homes as well as their ability to borrow for the next home.

Many of these borrowers had excellent credit histories prior to that time, yet they still cannot borrow again until certain time parameters are met. This article identifies those parameters as well as the requirements from loan underwriting groups for borrowers who are now emerging with repaired credit.

Tips For Homebuyers: How Long To Wait For Borrowing After Bankruptcy And Other Financial Setbacks

A big "thank you" goes out to Mitch Wright (a top mortgage lender in Tallahassee) for providing the information used in this article.

The four primary loan types below include the FHA, VA, USDA and Conventional. The new "waiting periods" for each, along with each financial setback group are identified below.

FHA Requirements

  • Foreclosure: 1-3 years from completion date. (As little as 1 year if borrower qualifies for "Back to Work" see Mortgagee Letter 2013-26 for qualifying criteria.)
  • Short Sale Deed-In-Lieu: 3 years from completion date.
  • Chapter 7 bankruptcy: 2 years from discharge date.
  • Chapter 13 bankruptcy: 2 years from discharge date. (Anything less than 2 years but greater than 1 year must be downgraded to a manual underwrite.)

VA Requirements

  • Foreclosure: 2 years for loan amounts < $417,000 - 7 years for loan amounts > $417,000.
  • Short Sale: 2 years for loan amounts < $417,000 - 7 years for loan amounts > $417,000.
  • Chapter 7 bankruptcy: 2 years for loan amounts < $417,000 - 7 years for loan amounts > $417,000.
  • Chapter 13 bankruptcy: 1 year if the repayment period has elapsed, 7 years for loan amounts > $417,000. (Applicant must also receive written permission from the bankruptcy court/trustee to enter into a mortgage transaction - if not minimum waiting period is 2 years.)

USDA Requirements

  • Foreclosure: 3 years from completion date.
  • Short Sale: 3 years from completion date.
  • Chapter 7 bankruptcy: 3 years from discharge date, 1-year possibility with proven extenuating circumstances.
  • Chapter 13 bankruptcy: 1 year of the repayment period has elapsed. (Applicant must also receive written permission from the bankruptcy court/trustee to enter into a mortgage transaction - if not minimum waiting period is 2 years.)

Conventional Requirements

  • Foreclosure: 7 years from completion date, 3-year possibility with proven extenuating circumstances.
  • Short Sale: 4 years from completion date, 2-year possibility with proven extenuating circumstances.
  • Chapter 7 bankruptcy: 4 years from discharge or dismissal date, 2-year possibility with proven extenuating circumstances.
  • Chapter 13 bankruptcy: 2 years from discharge date 4 Years from dismissal date, 2-year possibility with proven extenuating circumstances.

In a nutshell, depending upon the loan type, the loan amount, and the extenuating circumstances of your financial misfortune, you will have the ability to borrow again in 1 to 7 years.

If you sold a home by utilizing a short sale from 2008 through 2014, then it is likely that you are a candidate for one of these loan types. If you would like to accelerate your recovery, you should see our series of articles on credit repair and what it has done to help many of our customers.

It is important to get back in the market as soon as you can, because home values are rising and interest rates are crazy low. Many people buying a home today will recover their full prior loss and more within the next ten years (or sooner).

Not sure where to start with the pre-qualification process?

Simply tell us who you are and a trusted local mortgage lender will be in touch to answer all of your questions.

If you would like to know more about buying a home after a significant financial hardship, just drop me a note and we can help you understand you best likely course of action moving forward.

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