People ask me weekly, "If I let my home go into foreclosure or sell it in a short sale, how long until I can buy again?"
The answer is.... a long time. Plan on a minimum of three years and as many as seven or more.
Fannie Mae, the largest backer of mortgages in the world, recently sent a harsh message to borrowers for walkaways and other foreclosure situations.
Plan on waiting five years and then having good credit and a nice sized down payment.
The walkaway trend is popular here in Clark County (Las Vegas) and other areas where many homeowners find themselves upside down on their loans. These people owe tens of thousands more than the current market value of their houses.
In some cases, they are upside down by hundreds of thousands.
Some homeowners, who put little to no money down, think they may be throwing good money after bad. So, even if they can still afford the payments, they are simply choosing to walk away.
Fannie Mae will now prohibit foreclosed borrowers from getting another mortgage through them for five years, unless there are "documented extenuating circumstances." In those rare cases, you can buy again after three years.
No word on if this is the same on "settled" accounts like short sales, but most experts say to expect the same guideline.
Extenuating circumstances are life events that are "out of your control" that create a financial crisis, like death of the primary wage earner, medical-related illness to the primary wage earner or, sometimes job loss of the primary wage earner.
Extenuating circumstances are judged on a case-by-case basis and are challenging to prove. You will have to document this tragedy through death certificates, medical records, letters from the former employer, and you will have to prove that this event, and this event alone, this led to your financial demise.
It's not a common exception and underwriters are usually pretty skeptical when faced with it. Be prepared to provide an extensive paper trail of documentation.
Getting in a bad adjustable rate mortgage or the market turning downward is not an extenuating circumstance.
Even after five years, Fannie Mae will require borrowers with foreclosures to make at least a 10 percent down payment. They will need a minimum FICO credit score of 680 for a new loan.
Freddie Mac counts foreclosures for seven years. FHA is currently at three years but it is expected they will increase this soon as well.
The bottom line, once again, as I keep preaching, is to avoid foreclosure and short selling when possible. There is nothing positive accomplished from either strategy. Note modification is the way to go.
If there is no way to avoid the foreclosure or short sale, plan on renting, leasing or leasing-to-own for the next three to seven years.
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