Buy a New Home With A Foreclosure In Your Past? Short-Sale? Bankruptcy?

September 06th, 2010

Mortgage calculators factor income, debts and down payment into mortgage calculations, but not credit history, especially severely delinquent credit items. Whether a conventional mortgage from Fannie Mae or Freddie Mac or a government insured mortgage FHA mortgage if you have a major derogatory credit item in your past you may still be able to purchase a new home. If you meet the eligibility requirements below, go ahead and use the prequalification calculator to determine your purchasing power.

The four major credit delinquencies that have the greatest negative impact on a credit report in order of decreasing severity are foreclosure, bankruptcy, short-sale and late mortgage payments. Here are the current guidelines for conventional and FHA mortgages for home buyers who may have one of these derogatory credit items in their past.

Foreclosure

If you lost a home due to foreclosure recent guideline changes have made conventional loans more available to you for a new home mortgage than in the past. Conventional underwriting standards are stricter than FHA for the time frame that must pass since a foreclosure on a mortgage applicant’s credit record.

Fannie Mae requires a period of seven years to have passed since the final discharge of a foreclosure before you are eligible for another Fannie Mae mortgage. If you can prove extenuating circumstances, such as foreclosure due to death of a co-borrower, transfer of employment, extended military service or some examples, the time frame may be shortened to three years. If you feel you have a viable extenuating circumstance it is advisable to have your situation pre-approved by a lender before going shopping for your new home.

The guideline for a new FHA mortgage after having a foreclosure is that three years must have passed before you can be eligible for an FHA mortgage, no extenuating circumstances allowed. If you have had a foreclosure that was completed at least three years ago and want to purchase a new home use the prequalification calculator to determine your ability to purchase using FHA mortgage financing.

Bankruptcy

As with foreclosure, FHA is more lenient in underwriting guidelines on bankruptcy than conventional underwriting. Conventional mortgages require at least four years to have passed since your bankruptcy was fully discharged. FHA considers you eligible to apply for a new home loan after only two years since your bankruptcy was discharged.

Short sale

Perhaps as common as foreclosures today, many American homeowners have chosen to undergo a short-sale, or pre-foreclosure sale, instead of foreclosure. Provided you were current on your mortgage payments at the time of your short sale Fannie Mae considers you eligible for a new home loan after two years provided you put 20 percent down, four years if putting 10 percent down.

FHA under certain circumstances will allow you to apply for a new purchase mortgage immediately after a short sale. The most important circumstances are that your mortgage was current through the short sale and that you are not benefiting with the purchase of your new home. For example, you are not purchasing a bigger, better, more expensive home in the same vicinity as the one you recently sold short.

Late mortgage payments

There’s not much difference between conventional and government underwriting standards when it comes to mortgage payments that have been late in the past. If you have a 30-day late payment for a mortgage on your credit report you will have to wait 12 months before you will be eligible for a new home loan. FHA does have a provision for an underwriter to waive the guideline if you can provide proof of extenuating circumstances; as mentioned above it is advisable to consult with your lender regarding your circumstances before applying for a new mortgage.

One overriding factor for all these circumstances is maintaining all your other credit obligations current during the required waiting periods from your foreclosure, bankruptcy or short sale. If your major derogatory item is an isolated event and you are able to maintain all your other debts with current and timely payments you greatly enhance your ability to be approved for a new home loan. Use the free mortgage calculators available to determine your qualifying potential.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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