HOME BUYERS

Your Guide to Buying a Home After Bankruptcy, Foreclosure, or Short Sale

We get it. Sh*t happens! Emergency expenses, job loss, health issues, even global pandemics—anything can cause financial hardship. Treadstone is proud to help folks going through financial hardship get back into their normal rhythm, and back into their own home. As we like to say: onward and upward! No matter your situation, we’re here to help. We might not be financial advisors, but we’ve seen just about every financial situation you can think of. Below are the core requirements for most buyers. Additional steps, requirements, and qualifications may be applied, depending on your situation.

 

Table of Contents:

 

How to Buy a House After Bankruptcy

Buying a home after bankruptcy is still possible! Anyone with a past bankruptcy is eligible to purchase a home with a mortgage in Michigan. Home buyers usually just need to wait a certain amount of time to qualify for a home loan and rebuild their credit. The waiting period depends on your situation, and the type of bankruptcy you filed for.

Bankruptcy can remain on your credit history for ten years, but you can qualify for a home loan long before then.

 

Buy a Home After Chapter 7

When buying a home with a conventional loan after filing for Chapter 7 bankruptcy, the minimum waiting time is 4 years with re-established credit. Alternatively, if you have documented extenuating circumstances and have reestablished credit, the minimum waiting time is only 2 years! This criteria is set by Fannie Mae and Freddie Mac, the government-backed organizations that set the standards for conventional loans nationwide.

Buying a Home After Bankruptcy Chapter 13

Chapter 13 requires slightly different requirements from Chapter 7. For conventional loans, Chapter 13 filers must wait a minimum of 2 years from discharge, or 4 years from dismissal.

Buy a home with FHA, VA, RD, or Portfolio Loans

Purchasing a home with government loans or independent loans is a little different than a conventional loan! Below are the waiting times for government loans offered by Treadstone:

  • FHA loans: 2 years with reestablished credit
  • VA loans: 2 years with reestablished credit
  • RD loans: 3 years with reestablished credit

With portfolio loans, there is a waiting period of 3 years with reestablished credit.

 

How to a House After Foreclosure

Buying a home after a previous foreclosure requires reestablished credit, as well as a minimum waiting period. A waiting period is based on your loan program, as well as your individual situation.

Credit reestablishment is essentially building your credit profile from scratch—you can use tools like secured credit cards or secured loans to build a new, healthy credit history.

Buy a home with a conventional loan after foreclosure

If you’d like to use a conventional loan to purchase a home after a previous foreclosure, you’ll need to wait a minimum of 7 years with reestablished credit. If you have had extenuating circumstances in your foreclosure, and you have documentation of those, the waiting period for conventional loans is 2 years, paired with reestablished credit.

Like bankruptcies, these standards are set by Fannie Mae and Freddie Mac. Conventional loans are a fantastic choice for most homebuyers, which reasonable qualification requirements, and a low down payment.

Buy a home with government loans after foreclosure

Government loans have slightly less strict requirements. Below are the minimum waiting times required with credit reestablishment for government loans, including 0% down loans:

  • FHA: 3 years
  • RD: 3 years
  • VA: 2 years

Additionally, if you purchase a home with a portfolio loan, you’ll need to wait a minimum of 4 years, plus reestablish your credit.

 

How to Buy a House After a Short Sale

Short sales are when, in financial hardship, a homeowner sells their home for less than the owed balance on its mortgage. This may happen when home values decline significantly or when the property’s condition deteriorates.

During a short sale, all proceeds from the home’s sale are given to the lender, and the remaining loan balance is either still owed to or forgiven by the lender. Short sales are preferred by lenders over a foreclosure, so the waiting periods and qualifications are slightly more relaxed.

If purchasing a home with a conventional loan after a short sale, you must wait a minimum of 4 years with reestablished credit. If you have documented extenuating circumstances, you may only need to wait a minimum of 2 years, but you must still have reestablished credit, and qualify for the loan with a lower LTV (loan-to-value) ratio—this means you will need to place a larger down payment on your new home purchase.

If purchasing a home with government loans after a short sale, you must wait for the following periods, and qualify with reestablish credit:

  • FHA Loans: 3 years, if delinquent at the time of the short sale
    • There is no waiting period if all debt was current (meaning not delinquent) at the time of short sale
  • VA loans: 2 years
    • Like FHA, there is no waiting period if all debt was current at time of short sale, and overall credit standing was healthy after your short sale
  • RD loans: 3 years

When purchasing with a portfolio loan, you must wait a minimum of 4 years, and qualify with reestablished credit.

 

Frequently Asked Questions

What does reestablished credit mean?

Reestablished credit means improving your credit and making up for the negatively weighted marks in the past.

In order to qualify for a new loan, you must meet the original requirements for that loan—including credit score and other credit profile requirements. Because of this, you must improve your credit enough to meet the original requirements.

Improving your credit can be done by continuing to pay your monthly payments and taking out new lines of credit. Credit-building secured loans are available, and secured credit cards can be used!

What are extenuating circumstances?

Extenuating circumstances are events outside of your control, and result in a rare, non-reoccurring financial burden. Examples may include:

  • Serious illness & medical events
  • Death of wage earner
  • Layoffs or job severance
  • Divorce – legal bills may be considered extenuating, but not ongoing child support
  • Layoffs & financial hardship related to COVID-19

How do I provide documentation to prove extenuating circumstances?
Your documentation is dependent on the type of circumstance. Typically, you must provide bills, legal notices, tax returns, lease agreements, severance papers, or other official documentation.

For example, documentation usually accepted for a medical emergency may be medical bills, insurance notifications, and in the case of income or job changes, paystubs, tax returns, or notifications from your employer may be needed. Your Loan Officer will know more!

 

 

Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on their principal residence to take advantage of declining market condition and purchased a similar or superior property. The information shown above is intended as general financial information based on current loan program standards and is subject to change at any time without notice. It in no way constitutes legal advice or credit counseling. The waiting periods above may vary by loan program on how they are measured. Additional overlays or conditions may apply. A borrower’s experience may vary based on their unique circumstances. Contact a Treadstone Mortgage loan originator for more information.

Onward and
upward after
financial hardship!