How long do I have to wait to buy another house if I do a short sale?

I often get this question from people at cocktail parties and other social events that I attend. The first time this was posed to me, my thought was why on EARTH would you even be THINKING about buying another house after you just went through the agony of a short sale? But after wiping the drink that flew out through my nose off of the person that I was talking to, I realized, OK, this is a legitimate question.

So, you came upon hard times, you might have made some bad financial decisions (who hasn't?), or you lost your job. It happens. And truth be told, to look forward to the time when you can take the plunge again into the pool of homeownership is actually quite a cheerful way of looking at things. It reflects hope, a kind of optimism that you thought could only be found in stories about little red-headed orphan girls with bad hairdos and funny names.

So here is a rundown on the waiting periods after a "derogatory event". And, who knew?, it matters whether you got a conventional, FHA, or VA financing, and a conforming or non-conforming loan. (Confused yet? If so, just call me.)

Conventional Financing

Pre-foreclosure or Short sale

Conforming. Loan-to-value (LTV) less than or equal to 80%: Two years. LTV 80.01-90%: Five years. LTV greater than 90.01%: Seven years

Non-conforming. Loan amounts over $1,000,000: Seven years from completion date. Loan amounts less than $1,000,000: Unless there exists "fully documented and supported extenuating circumstances", Seven years.

Chapter 7 Bankruptcy

Conforming. Four years or greater from either the discharge or dismissal date.

Chapter 13 Bankruptcy

Conforming. LTV less than or equal to 80%: Two years or greater from discharge date, or four years or greater from dismissal date. LTV greater than 80.01%: Four years or greater from either discharge or dismissal date.

Multiple Bankruptcy Filings within the last seven years (who does that?)

Conforming. LTV less than or equal to 80%: Five years or greater from the most recent discharge cor dismissal date. LTV 80.01%: NOT ALLOWED. (You better think long and hard about this one.)

Non-conforming (all bankruptcy types). Loan amounts over $1,000,000: Seven years from completion date. Loan amounts less than $1,000,000: Unless there exists "fully documented and supported extenuating circumstances", Seven years.

Foreclosure

Conforming. Seven years.

Non-conforming. Seven years. No extenuating circumstances allowed.

Deed-in-lieu of Foreclosure

Conforming. LTV less than or equal to 80%: Four years from completion date, subject to owner-occupant purchase or limited cash-out refinance AND, if a purchase transaction, applicant must contribute from their own funds, the greater of 10% minimum down payment or the minimum required by the product. If this requirement is not met, the waiting period is seven years.

For LTV greater than 80.01%, it is five years subject to owner-occupant purchase or limited cash-out refinance, AND, the maximum LTV is 90%. Contribution as above also applies. Again, if not met, the waiting period is seven years.

If the transaction is a cash-out, second home or investement, the waiting period is seven years.

Non-conforming. Loan amounts over $1,000,000: Seven years from completion date. Loan amounts less than $1,000,000: Unless there exists "fully documented and supported extenuating circumstances", Seven years.

FHA

Foreclosure/Deed-in-lieu of foreclosure. Generally, for a foreclosure or deed in lieu, the waiting period is about 3 years. Of course, extenuating circumstances beyond your control may save you, but only if the borrower has established good credit since. Unfortunately, transfer or relocation does not count as exteby-nuating circumstances.

Bankruptcy. Chapter 7. Two years, if the borrower has established good credit since the discharge and demonstrated ability to manage financial affairs. (Not sure how this is determined.) It could be less than two years if the good ol' "extenuating circumstances" come into play, and the borrower can show that those circumstances are not likely to recur.

Bankruptcy. Chapter 13. After a one-year payout period, the borrowers performance is satisfactory, and court approval is granted.

Credit counseling. After one year payout plan is successful and borrower receives written permission from the agency.

VA

Chapter 7 Bankruptcy. In general, if the bankruptcy occurred more than two years ago, underwriters for VA loans can disregard it.

For less than two years, the VA looks at the borrowers almost on a case-by-case basis. They look at whether credit has been reestablished satisfactorily. Further, if the bankruptcy was deemed to be "beyond the applicant's control", the applicant's may be able to qualify if certain requirements are met. Divorce, unfortunately, is not normally viewed as beyond an applicant's control.

Chapter 13 Bankruptcy. If applicant has completed all payments for the requisite two to five year period, the applicant may qualify. If payments are being made for 12 months on a satisfactory basis, they may qualify.

Foreclosures. For this, a complete look at the file is necessary. In general the guidelines for bankruptcy is followed. Veterans need to be aware, though, how thier eligibility may be affected for any subsequent loans.

So there you have it, the general rules for buying another home after a short sale, bankruptcy or foreclosure. A follow-on question is always "how bad will my credit be affected?". The short answer is always, of course, it depends. If you're doing a short sale, you're probably behind in your payments at least a few months. That in and of itself will damage your credit by 50-300 points the experts say.  I personally don't know anyone whose credit was only dinged a mere 50 pts after missing payments and doing a short sale. But if the statistic is there, it must have happened somewhere.

With a bankruptcy or foreclosure, you can count on a reduction in your credit score of several hundred points. There's really no getting around this.

One other tip to keep in mind, there are no quick fixes to repairing your credit. If it sounds too good to be true, you know it probably is. You know what the rules are, stick to them, and we'll all be OK.

Thanks to my friends at Bank of America for contributing to this post.

Thanks for reading!