Not a week goes by when we are not asked “how soon can you buy a home or refinance a mortgage with a previous foreclosure, short sale or bankruptcy”. As the market continues to improve, many people are still seeking mortgage loans. Home buying opportunities have never been more affordable coupled with the low interest rates. Refinancing still remains a viable option for people who can qualify. Despite some of the opportunities in the marketplace, many people have credit challenges that impede their ability to secure a mortgage loan.

The biggest myth is that you must wait five years from a  short sale, foreclosure or from a bankruptcy to purchase or refinance a house.

Here is the direct guideline from HUD on foreclosures:

A borrower is generally not eligible for a new FHA-insured mortgage when, during the previous three years his/her previous principal residence or other real property was foreclosed, or he/she has given a deed-in-lieu of foreclosure.  The three years seasoning is from foreclosure completion to the Note date of our transaction.  A filed Notice of Default is viewed the same as a foreclosure.

This means 36 months from the short sale or foreclosure is when you can buy a home or refinance a mortgage within government mortgage loan program. The government loans we are speaking about specifically include both FHA Loans and USDA Loans.

Here is the guideline from HUD on short sales:

Unless 36 months have passed, Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to: Take advantage of declining market conditions,  and to purchase, at a reduced price, a similar or superior property within a reasonable commuting distance. It must be very clear in the file that the borrower is not taking advantage of an upside down situation on their current home and simply using the short sale to remove the debt liability but then turn around and purchase a new similar or superior home. An increase in family size is not an acceptable reason for short selling the current home and then applying for an FHA-insured mortgage.

Here is a guideline from HUD on bankruptcies including Chapter 7 and Chapter 13:

Chapter 7 Bankruptcy:   Require 2 years seasoning  If bankruptcy is discharged for at least one year (but not less than 12 months), it may be acceptable if it occurred due to extenuating circumstances beyond the borrower’s control. Re-established credit must have no derogatory ratings. In lieu of re-established credit, credit letters covering the past 12 months from two alternative credit sources (i.e. telephone, cable, gas or electric companies) are required. If the borrower surrenders property in a Bankruptcy, it is construed as a deed-in-lieu / foreclosure and the seasoning requirement reverts to that required for a foreclosure – 3 years. The seasoning period starts, per FHA, when the discharge of the bankruptcy occurred to the Note date of our transaction.

Chapter 13 Bankruptcy:   A borrower paying off debts under a Chapter 13 bankruptcy may be eligible if the bankruptcy payments are included in the ratios, one year of the pay-out period has elapsed, the payment plan has a satisfactory rating and the borrower receives court approval to enter into the mortgage transaction.

How to buy a home or refinance a mortgage even if you have had a short sale, a foreclosure or a bankruptcy.

Now that we understand the facts for getting a government mortgage loan for buying a home or refinancing a mortgage, let’s interpret the guidelines for clarity.

Q I had a foreclosure two years ago, I would like to buy a house and I have good credit again, I’ve reestablished my ability to repay and I even have a big down payment, am I eligible?

A You could be eligible if the foreclosure happened due to extenuating circumstances beyond your control. Put another way, if the foreclosure was done for one of the following reasons: An exception may be granted to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure.  Divorce is NOT considered an extenuating circumstance.  However, the situation in which a borrower whose loan was current at the time of a divorce in which the ex-spouse received the property and the loan was later foreclosed qualifies as an exception. 

If you can meet this requirement, and can prove it with written documentation, yes you could be eligible for a foreclosure under three years. It is always up to the underwriter and it will be on a case-by-case basis. Please note, the underwriter will not deviate from these guidelines as these guidelines are mandated by the federal government.

Q We did a short sale on our primary residence four months ago, can we qualify for a mortgage loan right now?

A Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to:  To take advantage of declining market conditions, and  to purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.  It must be very clear that the borrower is not taking advantage of an upside down situation on their current home and simply using the short sale to remove the debt liability but then turn around and purchase a new similar or superior home. An increase in family size is not an acceptable reason for short selling the current home and then applying for an FHA-insured mortgage.

Why did a short sale takes place? Was it due to an extenuating circumstance beyond your control? These extenuating circumstances are the same considerations as those on a previous foreclosure transaction.

Q My wife and I, would like to refinance our mortgage, we have great credit, good equity in our home and we can document our income. We did a Chapter 7 bankruptcy, the full liquidation eight months ago. Can we refinance our mortgage?

A This will boil down to why did the bankruptcy take place, otherwise we are looking at an automatic two years from the final date of discharge reported on the credit report. You will want to see the guidelines above. As a lender, we have successfully been able to get transactions done as recently as one year and six months from a previous chapter 7 bankruptcy.

Q Will my old collections be a problem for me getting a mortgage loan?

A This is a wildcard. On files we’ve seen with over $2000 in old balances for medical collections, the underwriter has required these to be paid off at the close of escrow. $2000 seems to be the amount of maximum medical collections permitted in most cases. The guidelines as of now are as follows: Collection accounts do not need to be paid off at closing, but do need to be explained by the borrower with a strong explanation letter regarding the circumstances and evidence the problem has been remedied.    Medical collections are more lenient, but still reviewed in context of the entire credit picture.   A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty.  When delinquent accounts are revealed, the underwriter must document their analysis as to whether the late payments were based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower, including delayed mail delivery or disputes with creditors.  

If there is a documented history of the disregard for monthly financial obligations the underwriter simply has the discretion to be more strict surrounding previous collections.

*Mortgage Tip if you know you have collections and are looking to refinance a mortgage or buy a home, talk to the mortgage lender first and let them pull a copy of your credit report. Do not pay off old collections and so you talk with the loan officer first. Doing so could artificially drop your credit score making you eligible for financing.

To clarify, a previous short sale, a previous bankruptcy or at previous foreclosure action, as it relates to the origination of the new mortgage loan, the mortgage lender will review each action from the date last reported on the credit report.

For example if you did a short sale in May of 2009 and didn’t report on your credit report until June of 2009, the lender you’re using for the new mortgage loan will go off of June of 2009

If you’re considering buying a home or refinancing a mortgage and have a previous credit challenge, you do not necessarily have to wait five years. In most cases the longest you have to wait so long as the rest of your credit profile qualifies is three years. Government mortgage loan programs including FHA Loans and USDA Loans are more interested in the “what happened story” then they are black-and-white. This could prove to serve you well when trying to secure a mortgage loan with the previous credit deficiency. Get a mortgage rate quote online now. Get A Mortgage Loan Post Short Sale, Foreclosure or Bankruptcy today.