You might be able to buy sooner than you imagine
During the “Great Recession” (as some who survived it unscathed euphemistically call it, others call it the Great Depression), millions of people lost their homes to foreclosure or had to declare bankruptcy. In many cases, these individuals probably thought it would be many years until they could buy a home again.
The rules governing a situation like this are complex and varied. Circumstances surrounding the reason for the foreclosure, the type of bankruptcy filed and how the property was disposed of all factor into how soon an individual can qualify for a new mortgage.
In general, two to four years is the waiting period, although if a borrower has declared bankruptcy more than once in a seven-year period, then they will have to wait five years.
The shorter window of two years is applicable to those who can show extenuating circumstances. Circumstances such as huge medical bills or a temporary job loss (I say temporary because you will have to have a job to get a new loan if you lost your old one) might qualify you for the shorter window.
If the borrower is willing to take an FHA loan (which costs more than a traditional loan due to the cost of mortgage insurance), then one can qualify for a new mortgage in as little as 12 months if there was an extenuating circumstance, or 24 months if there were no extenuating circumstances.
FHA loans require 3.5 percent down and have a loan limit of $625,500 in Eagle County. One significant limitation, though, is FHA loans generally will not work on condos here. There is an arduous and expensive FHA approval process that an association must go through to get FHA approval, and one of the requirements is banning short-term rentals, which few HOAs want to do. FHA also does not allow any deed restrictions, so even communities such as Vail Commons that do ban short-term rentals are not eligible.
Another vexing issue for people who have declared bankruptcy and lost their homes at the same time has been the waiting period getting the bank to take the house after the debt has been discharged. I know of one case in Colorado where the homeowner has been waiting three years for the bank to make up their mind to take the house, even though his bankruptcy was discharged more than two years ago. In most cases, the effective date for starting the waiting period will be the date of the discharge of the bankruptcy, not the date the house was finally deeded over to the lender.
If you are applying for a VA loan (which allows for 100 percent financing) after a bankruptcy, then you must wait two years, unless it is a loan amount greater than $417,000, and in that case, you must wait seven years.
If a borrower went through foreclosure but did not declare bankruptcy, then they are subject to waiting seven years if there were no extenuating circumstances, or three years with extenuating circumstances. If you worked out a deed-in-lieu of foreclosure (which in itself can take several years sometimes), then you can reapply in two years if there are extenuating circumstances or four years if there were not, based on the date the house was turned over (unless you go for an FHA loan).
If you did a short sale (where the lender agreed to take less than the amount owed), then you will generally have to wait two to four years to get another mortgage loan other than a FHA loan.
In addition to the waiting period, a borrower will have to show they have re-established credit and saved up a down payment. Some loan programs may require an additional down payment if there is a past issue.
I have not covered every scenario here, and there are many pages of ins-and-outs to all of the above guidelines. If these situations apply to you, then it would be best for you to sit down with a lender and go through every aspect of your situation in detail. Keep in mind that some lenders have additional rules above what FHA, Fannie Mae or Freddie Mac may impose, so it may be worth your time to talk to a second lender if the first doesn’t find at least a path for you to follow to work toward home ownership in the near future.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.
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