After a Foreclosure or Short Sale?

Can I Get a Mortgage after an FHA or VA Foreclosure or Short Sale?
by Karina Gafford

If you were following along with MBO’s last month’s series of articles dealing with the implications of short sales for military families, you are aware that defaulting on mortgages has grown into a significant issue within the military community.  Given that military families move on average every two to three years, the question of the possibility of homeownership after a default on a mortgage presents a real concern.  A discussion with a lender who is experienced in dealing with both military families and distressed loans is best equipped to answer questions that relate to your specific concerns regarding buying another home after a default, but the following information should help prepare you for that conversation.  You can find lenders with this experience in the MBO Business Directory.           

Why is Home Buying after a Mortgage Default an Issue for Military Families?

To better understand why the question of getting another mortgage is so relevant to the military community, let us briefly recap the series of articles on short sales.  Military families faced considerable challenges during the recent recession; the quick and deep collapse of the housing market meant that those who purchased a home at the height of the market suffered heavy losses, leaving these families with difficult financial and ethical dilemmas when orders to change duty station arrived.  Military families could not remain in their homes and refinance; the homes were immediately considered second homes or investment properties, and thus not eligible for the great loan modification options that their civilian peers could use to offset their financial losses.  

In the face of huge losses, servicemembers could choose one of several options.  First, choose to sell the house at a loss, bringing the owed amount to the closing table.  Second, rent out the house, but this was often at a heavy loss each month.  Third, try to continue to pay the mortgage, but this was often challenging given the high unemployment rates of military spouses.  Despite that 85-percent of the approximately 750,000 Active Duty military spouses report that they wish to work, the unemployment rate among spouses is a reported 26-percent, which is three times that of their civilian peers.  Without earning a second income, even if only for the first few months following a change of station, military families struggled to pay mortgages on homes left behind.  The fourth option available to military families was defaulting either through foreclosure or short sales.  A further option for defaulting is known as a deed-in-lieu, but that puts military families in essentially the same financial and credit situation as foreclosure, so we will look at the two together.

So, Can I Buy a Home Again?

The quick answer to whether homeownership is a possibility for military families who did choose the fourth option, defaulting, is yes.  However, there are some constraints.  Both time limits and a show of an otherwise good credit history are both necessary in order to prove credit worthiness to prospective lenders.  While conventional loans may differ substantially based on the individual lending institution, the Federal Housing Authority and the Veterans Administration have developed standard policies for the mortgages they choose to insure in light of the frequency of requests over the past few years.  

FHA Loans
In the case of FHA loans, the mortgage insurer has different limits for bankruptcies, foreclosures, and short sales.  For a Chapter 7 bankruptcy—a bankruptcy where all assets are liquidated, the standard waiting period to apply for another loan is two years; however, they will accept applications after just one year in the case of extenuating circumstances, though each of these are on a case-by-case basis.  For a Chapter 13 bankruptcy—a bankruptcy where debts are renegotiated, the FHA only requires a one year waiting period prior to an application for a new home mortgage.  Finally, for both the case of a foreclosure and short sale, the FHA requires a standard two year waiting period.  In each of these cases, the prospective borrower must prove his or her credit worthiness.  The foreclosure or short sale should not reflect a series of bad credit decisions, showing poor financial management and a high credit risk for the agency.  Instead, borrowers should aim to use the two year period to recover, and aim to save and put aside the requisite 3.5-percent (or more!) of the intended purchase price for their next home.

VA Loans
For VA loans, the mortgage insurer similarly has its own set of time limits for bankruptcies, foreclosures, and short sales.  Just as with the FHA loans, too, those who seek VA loans after the waiting period should show that they have used the time between loans wisely, making sound financial decisions and putting aside savings to cover a prospective six months of mortgage payments.  Not only will these savings provide borrowers with the financial security and peace of mind that perhaps a previous loan default situation may have stripped away, but also it will show the requisite liquid assets that a lending institution will request to see prior to agreeing to a mortgage.  With regard to term limits, the VA requires a two year waiting period for a Chapter 7 bankruptcy, though as with the FHA, they permit a one year wait in the event of extenuating circumstances.  Similarly, a Chapter 13 bankruptcy requires only a one year wait.  Finally, a foreclosure and a short sale require a two year waiting period.  However, there are additional conditions that exist with a VA loan.

In the case of a VA loan, the original VA loan benefit no longer exists for the Veteran.  On a more positive note, however, the Veteran can apply for a bonus entitlement, a second VA loan that permits military families to again receive a zero or low down payment loan, offering both lower credit score requirements and no property mortgage insurance monthly premium payments.  In order to receive a bonus entitlement, however, the loan amount must exceed $144,000, but total loan amount must come to less than the maximum amount for the county, as set by the VA.  These top limit amounts vary widely across the US, but they each reflect the cost of living and property values in their respective areas.  Achieving a second VA loan, however, comes with far more conditions than a traditional VA loan, and not all VA loan representatives are trained to determine whether your loan needs will meet the specifics required by the VA.  Contact a mortgage lender who specializes in working with VA loans to make sure that they can address all of your questions or concerns. MBO partner, Veterans United, can talk to you to help you get started on your new path to homeownership.

If your family experienced a default on a mortgage and you have waited the requisite time to reapply for another one, contact a lender who has experience working with both military families and distressed loans.