Back in the Game: How to Get Another Deed After a Bankruptcy, Foreclosure, or Short Sale

Finding a mortgage again after a financial setback can seem like an impossible feat. But it’s doable.

Here, we consider foreclosures, short sales, and bankruptcies. We look at how they can be overcome for the purpose of acquiring a deed to a home.

How Long Does It Take to Get Another Mortgage After Foreclosure?

If you’ve experienced a foreclosure or other mortgage setback, you may be wondering what it will take to get a home loan again. Various loans have different waiting periods to endure after a foreclosure. If certain unusual events caused a loss of income (called “extenuating circumstances”), lenders shorten the waiting periods.

If you have a 620+ credit score and intend to apply for a loan from Fannie Mae, you’ll need to wait seven years after foreclosure. Buying after a deed in lieu of foreclosure or after a short sale? You’ll need to wait four years.

Freddie Mac also has applicants wait seven years beyond a foreclosure. Buying after a deed in lieu of foreclosure or a short sale is faster; it takes only four years.

But you could qualify in as little as two to three years for a conventional loan with Freddie Mac or Fannie Mae if you can show extenuating circumstances led to your previous setback. Lenders want to lend. They don’t want to make things unduly hard for someone who’s experienced a setback that likely won’t happen again.

So, was your foreclosure caused by your ex defaulting after you split up? Were you laid off at work? Overwhelmed by unexpected medical bills? Did a working member of your household die? In other words, if you can show that your foreclosure stemmed from unforeseen factors outside your control, a lender can cut you some slack.  

Still, applicants who’ve experienced foreclosure must put 10% down. That’s a larger down payment than the normal 3% minimum with conventional loans. And, as with any mortgage, the lender expects the borrower to maintain a reserve fund for emergencies, and enough income to fund insurance, property taxes, and home upkeep.

What About Government-Backed Loans?

Government-backed loans can be very helpful for people rebuilding their credit. For example, loans backed by the Federal Housing Administration may be available immediately to someone who’s released a prior deed into a short sale to avoid defaulting on a mortgage loan.

Your core options in the government-backed arena are these:

• An FHA loan. With a credit score of 580+ (or even lower, depending on down payment size), an applicant can request a loan backed by the FHA. The 3-year post-foreclosure waiting period applies whether you’ve been through a short sale, a foreclosure, or a deed in lieu.

• A VA loan or USDA loan. The U.S. Department of Veterans Affairs (VA) guarantees VA loans for service personnel. The VA waiting period is two years after a foreclosure or a Chapter 7 bankruptcy. A VA loan can be issued just one year after a Chapter 13 bankruptcy. A short sale might not cause a waiting period at all. The U.S. Department of Agriculture (USDA) can offer low- to no-down payment loans after a post-foreclosure wait time of three years.

These loans have other requirements. Learn more with us about applying for:

• Loans backed by the Department of Veterans Affairs;
• Loans backed by the Federal Housing Administration; or
• Loans backed by the Department of Agriculture.

Expect to pay an additional monthly charge for mortgage insurance when your down payment is under 20%.

Increased income and paying down debt is essential to bolster your ability to get a mortgage loan. This gives you a better debt-to-income (DTI) ratio. The other major stumbling block on the way to a mortgage is a beaten-down credit score. For seven years, a foreclosure drags down a person’s credit score.

Getting your credit profile back into shape? Here’s a 5-point credit repair plan to help.

How Long Must I Wait to Apply for a Mortgage After Bankruptcy?

Sometimes a foreclosed home won’t sell for enough money to cover the debt. In this case the debtor should set up a consultation with a lawyer who works in bankruptcy law. Bankruptcy is one way to get that debt resolved.

Those who file for bankruptcy might need to wait three or four years before a lender will consider issuing a mortgage. Both Fannie Mae and Freddie Mac accept applicants four years after a Chapter 7 bankruptcy. If it’s a Chapter 13 bankruptcy, the borrower must wait two years from discharge, or four years from the date of dismissal.

Multiple bankruptcies in the past seven years will extend the wait time. But waiting can be cut down to two years post-bankruptcy if the borrower faced extenuating circumstances.

FHA loans can be had just a year or two post-bankruptcy.

Important note: Bankruptcy alone can only release you from certain debts. It doesn’t release you from your other obligations as a deed holder. Only the lender can do that.

Are There Any Options That Don’t Require a Wait?

Nonqualifying mortgage (non-QM) loans don’t require a wait after foreclosure or bankruptcy. These loan options, which fall outside of the standards imposed on Fannie, Freddie, and government agencies, are also more easily approved for households of modest incomes.

Some non-QM loans are available to people with credit scores as low as 500, and most are available to people with scores of 620+. Some allow the borrower to pay them over a span longer than 30 years. Non-QM loans are exceptionally forgiving when it comes to an applicant’s debt load. A non-QM borrower could have a ratio of debt to income that’s more than 50-50%.

The continued existence of non-QM loan products becomes a lifeline for borrowers who are sidelined by the mainstream lending options. But look out. To cover the risk to a lender that the borrower could default, non-QM loans charge a lot in interest. This shifts some of the lender’s risk to the borrower. Not only are non-QM interest rates and fees notoriously high. These loans often require balloon payments. Facing a large payment down the road places a heavy financial burden on the borrower’s future.

Unsurprisingly, a hefty down payment goes a long way to getting a non-QM loan approval. The higher the down payment, lenders know, the easier it will be to successfully recover the funds they lend.

Note: Ask your local credit union or private bank what they offer. Some private banks issue non-conforming “portfolio loans” the day after a short sale to qualifying applicants. Small banks or credit unions have loans that suit a variety of situations and needs.