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In recent years, millions of Americans have found themselves upside down in their home mortgages and when finances became tight and employers began trimming their work forces, many unemployed homeowners found that the only way out was to walk away from their homes. Some were fortunate enough to find a buyer and work with a lender that was willing to agree to a short sale. Others just let the home go into foreclosure.
The housing market is starting to turn around again and many Americans are growing tired of renting so some are wondering how long they have to wait to qualify again for a home loan. Most renters would rather own so they can build up equity and realize the tax advantages of home ownership. The short answer is it depends. It depends on if you did a foreclosure or short sale, as well as a number of other factors.
If You Sold your Home in a Short Sale: For those who were able to do a short sale, the recovery time for qualification should be shorter than with a foreclosure. Generally, you will need to wait 2 years to qualify for a conventional bank loan with a 20% down payment and four years with less than a 20% down payment. FHA financing will require a 3 year waiting period while both VA financing and USDA Rural loans only require 2 years. In addition, if you were current on all your payments before the short sale occurred, the wait time could be reduced significantly.
If Your Home was Foreclosed On: If you went through a foreclosure, the wait time will likely be longer than with a short sale. To qualify again for a conventional loan, the typical wait time will be 7 years. The good news is that government backed agencies like the FHA are much more forgiving. Americans that have been through a foreclosure can often qualify for an FHA loan in about 3 years. Those eligible for VA financing only have to wait 2 years.
Other Factors: Of course, no two situations are the same and there will always be other issues to take into consideration when qualifying for a home loan. Some of the primary ones are:
- Overall Credit Score: The higher the better obviously. So, make sure to stay current on all bills after the foreclosure or short sale and re-establish your lending credibility.
- Size of Down Payment: The same as with credit score, the higher the better. FHA loans can be obtained for as low as 3.5% down and conventional loans can be obtained with as little as 3% down. Ideally, a 20% down payment would be best so you can avoid paying private mortgage insurance (PMI).
- Provable Income: Hopefully, you have a healthy debt to income ratio and can show that you can really afford the house you want to buy. Otherwise, you may want to hold off until you either have a higher income or larger down payment.
Ultimately, you want to work with a mortgage professional who won’t shun you or treat you less than professionally, because he or she foresees a less than ideal prospective borrower. Secondly, you want to work with a mortgage professional who has helped others in the recovery process from short sales, bankruptcy, or foreclosure to happy homeowner. Ask very specifically about their successes with working with borrowers who have had short sales or foreclosures and if you are not comfortable with their answers, do not settle until you find the ideal lender; they are out there.