Buy A Home After Bankruptcy

When Can I Buy A Home After Bankruptcy and Foreclosure?

I was speaking with a friend the other day who about a year ago short sold a home following a job loss and related struggles. She had a short-sale and wanted to know when she could buy a home after bankruptcy and foreclosure or a short sale. Her situation is very common. She short sold her home following a job loss and nearly two years of negotiations with her mortgage lender. During negotiations of the short sale the loan was transferred (which led to the first buyer walking away) and numerous lost documents by the lender.

Eventually after a monumental effort negotiating with her lender the sale was finally approved. She was successful…so she thought. She could have taken the easy road and allowed the home to be foreclosed or filed for bankruptcy. But in her mind a short sale was certainly better than filing for bankruptcy or allowing the home to be foreclosed because it showed a greater sense of responsibility. It showed she was thoughtful and took her responsibilities as a borrower seriously…so she thought. Fast forward to a year later. Now she had stabilized her income and was trying to get pre-qualified for a new mortgage. She had worked hard to improve her credit score since the short sale and while her score wasn’t great, it was in the mid 600s and she felt confident that she could now get a new mortgage with all the advertisements that tout mortgages with credit scores of 500 or better. What a shock and surprise for her to learn that in most cases there is a 3 year waiting period after a short sale! That is the minimum for virtually every underwriter including Fanny Mae, Freddy Mac, & FHA. In fact some are even longer!

How Long After Bankruptcy Do You Have to Wait to Buy a Home?

FHA waiting period following chapter 7 bankruptcy is two years, unless you can demonstrate that “the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.” In chapter 13 a debtor can obtain a mortgage (with court permission) after 12 timely chapter 13 payments–while still in the plan.

“Wait a minute! You mean to tell me that if I had filed for bankruptcy instead of spending hours and hours negotiating a short sale I could qualify for a loan, but since I tried to minimize the negative affect on me…and more importantly on the lender I’m being penalized?”, she asked. The mortgage lender said, “essentially, yes. That’s right.” Imagine her bewilderment! Isn’t that upside down, backwards or something? Well yes it is. It is counter-intuitive. There is clearly something wrong with the system when a person takes the extra effort to short sale a property to avoid foreclosure or bankruptcy and she is penalized. To be fair, foreclosure is no better than a short sale as far as waiting period to buy a home. You mean to tell me that a short sale is tantamount (the same as or equal to) a short sale relative to how long you have to wait to get a new mortgage. Yes! The system is what it is. It is simply easier and faster to recover from bankruptcy and buy a home than to recover from a short sale or a foreclosure.