As a follow up to my blog last week about re-building your credit after a bankruptcy, foreclosure, short-sale, etc., I’d like to provide some info on current mortgage underwriting requirements for buying a house after one (or more) of these events.
Each mortgage type has different requirements for how long you have to re-establish credit before you’re able to qualify for financing. Generally speaking, FHA is the most lenient. Buyers can purchase a new home as soon as 24 months after a bankruptcy and 36 months after a full-blown foreclosure. If you sold your home in a short-sale, you could potentially turn around and buy a new home right away if you were current on your mortgage at the time you sold and the rest of your credit was reasonably solid. If you were in default on your mortgage going into the short-sale, you’re back to the 36 month waiting period.
Here is a Summary Chart along with the general guidelines for the 3 main types of finacing: Conventional, FHA and VA…
| Re-establish Time | Conventional | FHA | VA |
| Bankruptcy 7 | 4 years | 2 years | 2 years |
| Bankruptcy 13 | 2-4 years | 1 to 2 years | 1 to 2 years |
| Foreclosure | 5 years | 3 years | 2 years |
| Pre-Forcl/Short Sale | 2 years | 0 to 3 years | 1-2 years |
Conventional Home Loans: (Fannie Mae and Freddie Mac)
Bankruptcy:
(Waiting period begins on the final discharge or dismissal date.)
Chapter 7 and 11 bankruptcies: 4 years from discharge date.
Ch. 13 dismissed bankruptcy: 4 years from dismissal date.
Ch. 13 discharged bankruptcy: 2 years from discharge date.
Previous bankruptcy policy applies to persons who have a prior bankruptcy in the last 7 years. A person with multiple bankruptcies requires a 5 year period to reestablish credit.
For Chapter 7 and 11 bankruptcies, the waiting period may be reduced to 2 years with documented extenuating circumstances.
Pre-foreclosure Sale (Short-Sale):
This transaction involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage. The transaction must be approved by the lender, investor, mortgage insurer, if applicable, and all lien holders.
Short sales require a 2 year period to re-establish credit after the sale is completed.
Foreclosure:
The time for reestablished credit is 5 years. There are restrictions with additional requirements for the period between 5 and 7 years. During this period a 10% down payment will be required and the minimum score requirement is 680. No investment property allowed. No second home allowed. No cash-out refinances allowed. After 7 years normal guidelines will apply.
With documented extenuating circumstances, the waiting period may be reduced to 3 years. Deed-in-lieu of foreclosure is similar to foreclosure, except the waiting period is 4 years. The same restrictions apply between 4 and 7 years as above for a foreclosure between 5 and 7 years.
FHA Home Loans: (includes Utah Housing)
Bankruptcy:
Chapter 7: minimum waiting period is 2 years from discharge date
Chapter 13: Minimum 12 months from the bankruptcy filing date with AA payment history and transaction approval from the bankruptcy trustee. Buyers can potentially close on their new home while they are still in a Chapter 13 repayment plan.
Foreclosure:
3 years from completion of the foreclosure. Approval for closing sooner is sometimes possible with verifiable extenuating circumstances and underwriting approval.
Pre-foreclosure Sale (Short-Sale):
Guidance on Borrowers current on their mortgage(s) at the time of Short Sale:
Borrowers are considered eligible (with no waiting period) for a new FHA-insured mortgage if:
• They were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• The proceeds from the short sale serve as payment in full.
Guidance on Borrowers in default at the time of Short Sale:
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances.
Veterans Administration (VA) Home Loans: 
(Directly from the VA’s lending guide.)
Bankruptcy:
The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the BK Law
You may disregard a bankruptcy discharged more than 2 years ago.
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:
- the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
Foreclosure:
The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.
- Develop complete information on the facts and circumstances of the foreclosure.
- Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan.
Mike Anderson has written 9 articles on MasterMoneyTips.com
