I talked with some past clients/friends this weekend and they asked me the real estate question that makes even Google say, “uh… yeah, I’m gonna have to get back to you on that one,”: If I short sale or foreclose on my house, how long will it be until I can buy another house?
It seems like there should be a fairly clear-cut answer to this question, but despite the fact that I’ve heard it debated by dozens of agents and gotten information from several lenders on the topic, what it always comes back to is:
A. It depends.
B. I’m not sure.
C. As soon as you teach your baby to sing and learn choreography and she becomes a breakout Disney star and has the cash to buy you a house, but before she falls victim to the Disney child star curse and wastes all of her money on drugs, rehab and wigs to cover her freshly shaved head.
Assuming you love your offspring too much to put them through C and that you’d like a touch more information than B, let’s focus on the factors of A.
There are basically three issues with getting a loan after you’ve relinquished your house, whether it be through short sale or foreclosure.
Issue 1 – Your credit score. Lenders have guidelines about what range your credit score must fall into in order for them to loan money to you. Every time you miss a payment your credit score takes a hit. It’s impossible to know where your credit score will land after the process is complete. First there is the fact that the credit score algorithm is more inexplicable and unknowable than even the essence of life and soul and how they are tied together, more closely guarded and mythical even than the secrets of how Facebook decides which status updates go into your Top News stream. Next, we have to take into account what your credit score begins at, and then how long the process of short sale or foreclosure takes. Are you still paying your mortgage, or do you stop paying month 1 and then rack up 18 months of non-payment dings? Lastly, they say (and no, I don’t know who ‘they’ is. And yes, I’m suspicious ‘they’ is a palm-reader someone’s Aunt Millie consulted) a short sale will ding your credit less than a foreclosure will.
Issue 2 – The wait period in the lending guidelines by the Federal Housing Administration. These are actual timelines lenders have to adhere to in addition to an acceptable credit score. I have an email from back in July from a lender who listed the wait times for each of the different types of loans. She said if you had an FHA loan that you did a short sale on, you could potentially have no wait period (but only if you have no late payments and are left handed and were born with your second toe longer than your first toe but only on your right foot) and if you foreclose on an FHA loan, you will have a wait of 3-3.5 years. If you have a conventional loan and you do a short sale, the wait period is 2 years. For a conventional loan foreclosed on, she claims the wait is 7 years. I know I’m using a bunch of disclaimers here about this lender and what she ‘claims’, but that is just because of…
Issue 3 – All of the regulations and guidelines to this are constantly changing. Each lender also uses the guidelines slightly differently. As of the time I’m writing this, the most current information I was able to find about these guidelines is from last July. I’m not actually certain any of these time frames haven’t changed and I have absolutely no idea if they will be radically different or even just done away with by the time my clients are ready to buy. Maybe in 6 months the government will decide the only way to allow the housing market to recover will be to gift everyone over the age of 23.5 but under the age of 47.1 a yellow unicorn and abolish the system of FICO credit scores altogether. Or maybe the government will decide the only way to keep this disaster from happening again will be to punish people who foreclose by never allowing them to obtain a mortgage in any state but Ohio and only on houses with polkadots and stand-up showers but no bathtubs. These are things I just don’t know (though it’s possible Aunt Millie’s palm reader does… we should probably ask her).
The point of all of this is there are roughly 3.78 billion factors that come together to determine how long it will be until you are able to buy again after you foreclose or short sale your house. Many, if not most of the people who go down this road have no other choices. They must jettison the property (and likely more importantly, the payment) one way or another. The homeowner who is considering a short sale or foreclosure as part of a larger strategy for whatever reason just needs to be aware of the risks and potential pitfalls and ultimately, he needs to decide if it’s worth that leap into the unknown.