How Soon Can You Buy a House After a Short Sale or Foreclosure?

Why the way you leave matters

When you can't keep a home, the way you exit decides how soon you can buy again. This is one of the clearest reasons to act early. A short sale or deed in lieu typically has a shorter waiting period than a foreclosure, and keeping the home through a loan modification avoids the waiting period altogether.

Joe Hall began his career in lending with Bank of America and later worked as a licensed lending broker. He looks at a distressed situation the way a future lender will look at your file.

Conventional loans (Fannie Mae)

Fannie Mae's Selling Guide sets these standard waiting periods:

• Foreclosure: 7 years. With extenuating circumstances, 3 years, with added limits until year 7, such as a 90% maximum loan-to-value and purchase of a principal residence.
• Short sale (preforeclosure sale) or deed in lieu: 4 years, or 2 years with extenuating circumstances.
• Chapter 7 bankruptcy: 4 years, or 2 years with extenuating circumstances.
• Chapter 13 bankruptcy: 2 years from discharge or 4 years from dismissal.

Extenuating circumstances are nonrecurring events beyond your control that caused a sudden, significant drop in income or a catastrophic increase in obligations, and the lender will want documentation.

FHA and VA loans

• FHA: generally about 3 years after a foreclosure or deed in lieu. A short sale may qualify sooner in some cases, for example if you were current on your payments leading up to it.
• VA: usually about 2 years after a foreclosure.

Each program has detailed rules and exceptions, and individual lenders can add their own requirements. Get a pre-approval conversation going with a lender well before you plan to buy.

The cost of waiting, in plain numbers

Say two neighbors fall behind in the same year. One completes a short sale. The other lets the home go to auction. Under Fannie Mae's standard rules, the first could be eligible for a new conventional loan in 4 years. The second waits 7, unless they can document extenuating circumstances. That is three extra years of renting, at whatever rents are at the time, while home prices keep moving.

Choosing a short sale over a foreclosure is not only about the deficiency or the stress of an auction. For many families it decides whether they are homeowners again in the middle of the decade or near the end of it.

How to rebuild in the meantime

1. Pull your credit reports and make sure the short sale, deed in lieu or foreclosure is reported accurately.
2. Keep every other account current. Lenders look at your history after the event.
3. Save reserves and a down payment. Waiting periods are a good time to build both.
4. Keep the paperwork: your short sale approval, deficiency waiver, and any proof of extenuating circumstances.

This is general information, not legal or tax advice. Talk to a California attorney, a CPA, or a HUD-approved housing counselor about your situation.

What a lender will ask you

• The date your foreclosure was completed, or your short sale or deed in lieu closed. The clock usually starts there.
• Documents showing the event, such as the settlement statement or the recorded deed.
• If you are claiming extenuating circumstances, proof of what happened, such as a layoff notice or medical records, and evidence it is behind you.
• Your credit and payment history since the event.

Having this organized before you apply makes the conversation faster and avoids surprises late in escrow.

If you are behind right now

The waiting period you face later is decided by what you do now. If you can afford a modified payment, a loan modification keeps you in the home. If you can't, a short sale or a sale before the auction usually leaves you closer to your next purchase than a foreclosure would.

Start with what to do first when you're behind, and when you're ready to buy again, Joe can represent you as a buyer, including on new construction.