• 29
  • June
    2011

With the housing market being what it is from the buyer's perspective, many consumers wonder whether it would be wise to look at buying again after having gone through foreclosure or a short sale.

There is no question that foreclosure and short sales, as well as bankruptcy, affect one's credit score, and hence one's ability to qualify for a mortgage. Lenders will take that into account, looking at the potential borrower's ability to pay a loan off. Two questions that often come up are: how long should one wait after a short sale or a foreclosure to buy another home; and what should consumers do to improve their credit after a foreclosure or short sale?

How long one has to wait after a short sale or foreclosure before being able to qualify for a mortgage depends on the borrower's financial situation, the lender, and the amount sought, among other factors. According to the most recent Fannie Mae guidelines, after a deed-in-lieu of foreclosure, pre-foreclosure sale, or short sale, consumers must wait two years before securing a loan with a maximum loan-to-value ratio of 80 percent, and four years to secure a loan with a loan-to-value ratio of 90 percent. The loan-to-value ratio is the relationship between the mortgage lien amount and the total appraised value of the real property in question. Under FHA guidelines, more generous than Fannie Mae guidelines, there is a three-year waiting period after a short sale or foreclosure.

In terms of improving one's credit after a foreclosure or short sale, it is wise to consult a credit expert. Credit strategies can vary depending on one's financial goals and one's situation. Generally speaking, though it is wise to obtain one's credit reports from a credit monitoring service and carefully review them, noting anything that doesn't make sense. It is important not to close or dispute any account until speaking with a loan officer.

Potential borrowers should understand their credit score. Various tools and services are available for this purpose. It is also wise to become prequalified by a loan officer to review one's credit and financial situation to determine whether one will qualify for a mortgage.

Source: Forbes, "Getting A Mortgage After Short Sale or Foreclosure," Gerri Detweiler, 8 June 2011.