How to Buy a Home After a Foreclosure or Short Selling a Prior Home

December 18, 2013

This guest post was written by Catey Hill from Zillow.com. If you'd like to submit a guest post, email us at dimecontact@copera.org.

People who have been through the foreclosure or short sale process often feel like they’ll have to wait forever before they can buy a home again. But the waiting period may be shorter than they think. It’s typically between about two and seven years, and sometimes they can buy immediately.

Here’s what home buyers need to know about buying after a foreclosure or short sale.

Buying After a Short Sale
The waiting period for buying after a short sale is usually between two and four years. The length of time depends on the type of loan the buyer is applying for, the size of the down payment, and whether the buyer made late payments on the previous mortgage before the short sale. However, some people can buy immediately.

Here are the time limits for the different types of loans:

  • Fannie Mae/Freddie Mac mortgage: Buyers must wait four years if they only have a 10 percent down payment and two years for a 20 percent down payment or a 10 percent down payment and extenuating circumstances (these are factors such as illness and severe injury that were beyond a homeowner’s control and unlikely to happen again).
  • FHA mortgage: Buyers may be able to immediately buy a home if they were always current on their previous mortgage payments or defaulted for reasons that were beyond their control. Other buyers must wait three years. The down payment for FHA loans can be as low as 3.5 percent.
  • VA mortgage: Buyers must wait two years after the short sale. No down payment is required.

Buying After a Foreclosure
A buyer who previously had a home foreclosed on will likely have to wait between two and seven years to buy a home again, depending on the type of loan and any extenuating circumstances that led to the foreclosure.

Here are the time limits for the different types of loans:

  • Fannie Mae/Freddie Mac mortgage: Buyers must wait three years if they had extenuating circumstances; if not, they must wait seven years before buying again.
  • FHA mortgage: Buyers must wait three years before buying again.
  • VA mortgage: Buyers must wait two years before buying again.

Other Considerations
It is important to understand that these waiting periods are merely guidelines; home buyers still must qualify for the loans by proving to a lender that they will be able to make the mortgage payments in full and on time going forward. One of the biggest issues for people looking to buy after a short sale or foreclosure is their credit scores.

Experts estimate that a foreclosure may lead to a decline in a credit score of between about 200 and 300 points (credit scores range from 300, which is poor, to 850, which is excellent, so a foreclosure could take a very good 750 credit score and make it plummet below 500, which is not good); a short sale will have less of an impact. Late payments have the largest impact on a credit score. So, homeowners who completed a short sale and never paid a late mortgage payment will likely see the least impact on their scores.

Those looking to buy after a foreclosure or short sale should take steps to increase their credit scores by making sure they pay their bills on time, pay down large debts and avoid taking out multiple new lines of credit.  Potential buyers should also consider saving up for large down payments, as this can help mitigate the impact of less-than-stellar credit scores.

Once buyers who have previously experienced a short sale or foreclosure qualify to buy a new home, the loan process is the same as when they bought their previous homes.