Many Bay Area residents are ready to jump back into the Bay Area Real Estate market after having to sell their home through a distress sale (short sale or foreclosure) during the recent market downturn. There are many factors involved in the qualification for a conventional loan (Prime rate-based loans that are backed by Fannie Mae and Freddie Mac). In regards to the waiting period for those who have disposed of their homes through a distress sale, the waiting periods are currently as follows:
Short Sale/Deed in Lieu of Foreclosure – 2 year waiting period with a Minimum of 20% downpayment (or a Minimum of 10% downpayment with *extenuating circumstances) or 4 years with a Minimum of 10% downpayment
Foreclosure – 4 year waiting period with a Minimum of 20% downpayment (or a Minimum of 10% downpayment with *extenuating circumstances).
*Extenuating Circumstances are defined as nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. Examples of extenuating circumstances include Job loss, Divorce, Illness, Death in the family, Severe injury. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree,medical reports or bills, notice of job layoff, job severance papers,etc.)
For FHA Loans, the waiting periods are currently as follows:
Short Sale/Deed in Lieu of Foreclosure – 2 Years with the following exception:
There’s “NO” waiting period If the borrower was current on their mortgage and all other installment debt for the 12 months preceding the short sale, the subject property is not in the same geographical area as the short sale, and the short sale lender accepted the short sale as payment in full.
Foreclosure – 3 Years**
**Also, the Short Sale or Deed in Lieu will be treated as a foreclosure if the borrower was late on the mortgage and other installment debt for the 12 months preceding and at the time of the short sale. In addition, if the borrower pursued the short sale to take advantage of the declining market or purchased at a reduced price a similar or superior property within a reasonable commuting distance.
Depending on which lending institution you ask, you will receive different time-frames allowed to purchase again after a short sale or foreclosure. The reason is that some lenders have credit overlays, which translates into stricter underwriting guidelines than Fannie Mae and FHA have published. It’s also important to understand is that the absolute Minimum FICO (mid) score for obtaining a conventional loan is 580. Most lenders have credit overlays which make it a minimum of 620. Therefore, you need to see where your credit score is at and if it isn’t high enough yet, do everything you can to rebuild it. If you have the money to pay for everyday items, consider paying for more things with your credit card and paying that off every month. Getting a car loan and/or other personal loans and maintaining timely payments will also help bring your FICO score back to where it needs to be.
For a conventional loan, you will also need to save up for a large down payment (20% down, unless your distress sale had extenuating circumstances that you can document) if you want to get back in after 2 years. Otherwise, during the 3rd and 4th years after your distress sale your only option will be an FHA loan with mortgage insurance.
The bottom line is that you may be down, but you’re not out. So review these guidelines and if you are in a financial position to get back in the Bay Area real estate buying market and take advantage of these historically low mortgage rates, I encourage you to do so!