In Massachusetts over 80,000 homeowners lost their homes through a foreclosure or short sale since the housing crisis started in 2006. Some of these people had to sell their home with a short sale and some people whose homes were foreclosed have since gotten themselves back on their feet financially and are ready to purchase a home again.
The good news is you can buy a home after a short sale or foreclosure, but there are just a few eligibility requirements to follow.
That’s why lately we’ve had a lot of people ask us how soon they can purchase a home after doing a short sale or foreclosure. They realize this is one of the best times to buy a home: mortgage rates are at record lows, there’s an increase of desirable, affordable homes on the market to choose from, and apartment rents have gone up, actually making it cheaper to own a home than it is to rent in many areas. They’re ready to make a fresh start but aren’t sure when—or if—they can buy a home again.
The truth is many of these people fear that after they lose their home they will never be able to buy again. They may get conflicting information on how long they have to wait to get a loan or if they would even be eligible.
How Does a Short Sale Affect Your Credit?
A short sale and a foreclosure will have a negative impact on your credit score, but in every situation we have seen, the impact is less with a short sale.
The biggest impact to your credit is always caused by late payments and with foreclosures taking much longer than a short sale, there are more late payments for the credit bureaus to account for.
Credit bureaus are more forgiving if the loan is “settled,” like it is with a short sale, while in a foreclosure or a deed in lieu, a “default” is recorded.
The lender will have to verify that you have re-established your credit as well as consider other factors, such as your current salary, your debt-to-income ratio, and your savings.
How to Prepare to Buy Again After a Short Sale or Foreclosure
The first thing you need to do is get your credit back in shape. Here are some of the basics:
Establish credit at least one year before you apply for loan
Pay down or, if you can, pay off any credit cards you have
Get rid of credit cards you don’t use
Identify unnecessary expenses, cut back on spending
Have documentation for income, expenses, credit history
Figuring Out How Much You Can Afford
The next thing you will need to do is figure out how much you can comfortably afford each month in order to own a home. Calculate monthly expenses such as car and credit card payments to get an idea of what you’ll be able to afford. Use our Mortgage Calculator or download our Home Buyer Budget Worksheet to figure out your expenses.
One of the best ways you can make buying again easier is to hire a qualified mortgage broker who specializes in writing loans after a short sale or foreclosure. A good mortgage broker will verify your credit and also verify your income. The reason this is so important is because it’s a key component that underwriters use to ensure you qualify. If it is not done at the preapproval stage it can lead to a very disappointing turn down further into the process.
Of course, the mortgage payment is just one cost of owning a home. Be prepared to spend a portion of your income on repairs, heating and cooling costs, and overall maintenance of your home as well.
But by following these guidelines and getting your finances back in order, you’ll be able to enjoy the benefits of owning a home again.