Challenges To Distressed Homeowners Obtaining Financing

By: Lance T. Denha, Esq.

For those who have recently been involved in a bankruptcy, foreclosure or a short sale, know that purchasing a home subsequent to any of these proceedings will take some additional time, patience and more than likely, extra funds! This article is intended to provide insight on what to expect for those homeowners who have lost their homes and are now seeking financing after the fact. Many lenders tightened their general home loan qualification standards partly in response to the steep decline suffered by the mortgage lending markets in late 2008. Below is a brief summary and timeline for obtaining financing after coming out of Bankruptcy, Foreclosure or a Short Sale.

FORECLOSURE TIMELINE

If one has previously experienced foreclosure in the recent past and now find themselves in the market of buying a home, be weary that you may be asked to provide a down payment of 25 percent or more on the purchase of such home. However, and to the extent you qualify, an FHA (Federal Housing Administration) home loan still features down payments as low as 3.5 percent, but in order to qualify, your foreclosure will have to be at least three years old.

BANKRUPTCY TIMELINE

Generally speaking, the waiting period after a bankruptcy tends to be more black and white while the period for a foreclosure or a short sale is not so clear and as far as the time line is concerned is very grey. For example, once a debtor rids himself of bankruptcy, they would need to be flawless in their credit in order to qualify for the purchase of a home. In fact, many lenders have moved their own post-bankruptcy requirements for homeowners seeking financing after bankruptcy to three (3) years, thereby tightening up restrictions.

SHORT SALE TIMELINE

On the other hand, short sales couldn’t be more different. Unlike someone who experienced a bankruptcy, it is technically possible for a buyer whose prior loan wasn’t in default at the time of a short sale to get a new FHA-insured loan with no waiting period at all, however recent data doesn’t suggest any likelihood of this occurring. This doesn’t mean that a short sale comes without a cost just because a buyer qualified for a FH-insured loan. A debtor’s credit score can be impacted up to 250 points via a short sale or a deed in lieu of foreclosure. Lenders vary in their practice of reporting so discrepancies could arise. Additionally, the various reporting agencies (i.e. Experian, Equifax and Trans Union) report differently so make sure to always review your credit report and do not take the lenders review and assessment of your credit report as a fact.

A prospective buyer who is seeking out any rate from various lenders must have very clean or almost a perfect credit history when emerging from a bankruptcy, foreclosure or short sale. Any small notation on the credit report could disqualify a post-bankruptcy buyer from some loan programs even if the waiting period has been completed.

What if you have a financially worthy co-signer? If you have a strong co-signer (co-borrower), you can still be a homeowner with that person, but this would require an enormous amount of trust from that person because although the loan would be listed in that co-signer’s name, the property could be titled in both the debtor and co-signer’s name thereby allowing an equal share in the property. This places all the liability on the co-borrower from a credit standpoint, while the debtor is permitted equal ownership rights.

The one item that a buyer is to be cognizant of is that the buyer is now a higher risk debtor and this comes with a higher cost. The typical higher cost is the potential for larger down payments plus the fulfillment of other financial preconditions, in order to qualify as a credit worthy challenged homeowner. Despite these additional hurdles, the actual qualification is not guaranteed and comes with stress and unknown propositions. In almost every case, such loans are of sub-prime character, meaning they come with relatively high interest rates. Buyers are advised to consult a professional early on for advice that applies to their personal situation.