LOS ANGELES -- Next to filing for bankruptcy protection, nothing wrecks your chances of qualifying for a home loan like a foreclosure.
And if you got out from under an oppressive mortgage through a short sale -- when the bank agrees to accept less than what the homeowner owes -- lenders can look upon you just as unfavorably.
It's a reality that the former owners of the more than 4 million homes lost to foreclosure in the six years since the housing bubble burst will have to confront if they want to own again. But the passage of time makes all the difference.
That's because mortgage-lending guidelines that most banks follow prohibit them from making loans to people with foreclosure or a short sale in their credit history, often for years. Never mind the hit that one's credit score takes.
Still, some of the homeowners who were foreclosed upon when the market first started to skid are now looking to buy and getting loans.
"They're probably going to pay a little higher interest rate, but with rates so low, a higher interest rate of 4 percent is not a big deal," said Rosa Herwick, a broker and owner of Century 21 JR Realty in Henderson, Nev.
So how likely are banks to approve your mortgage application if you have a real estate-related blemish on your record? And can you do anything to spring yourself from the mortgage penalty box?
It depends on several factors, but largely on whether you had a foreclosure or a short sale.
Generally, borrowers who have a foreclosure in their credit history can expect to wait between two to seven years before a lender will even accept their loan application.
The waiting periods stem from guidelines most banks must follow in order to be able to sell their home loans. That's because potential purchasers, such as Fannie Mae and Freddie Mac, each have a different set of guidelines for the loans they will buy and criteria for whom they deem a qualified borrower.
The fact is, a person's credit score, employment history and other factors that make up one's creditworthiness will take a back seat to these resale guidelines.
If a buyer with a past foreclosure is seeking a government-backed mortgage, the waiting period can vary before they can qualify.
Take the Federal Housing Administration, which insures roughly 30 percent of new loans. Under its guidelines, former homeowners must wait three years from the date of their foreclosure before they can qualify for backing by the agency.
Compare the U.S. Department of Agriculture's housing program which requires three years, while the time penalty for a VA loan is two years. Fannie Mae and Freddie Mac, which own or guarantee about half of all mortgages, require the longest stretch: seven years after a foreclosure.
In some cases, the waiting periods for a foreclosure can be reduced.
Fannie Mae, for example, allows a three-year waiting period in the event the foreclosure was due to an extenuating circumstance. The company defines this as an event that was beyond the homeowners' control and resulted in a sudden reduction in income or catastrophic increase in financial obligations. Think job layoff, medical bills or divorce.
The FHA may grant an exception to its waiting period in the event that a wage-earner becomes seriously ill or dies. A divorce may qualify for an exception, but only in certain cases.
The roadblocks for having a short sale in your credit history can be less severe, and in some cases, waived altogether.
The FHA requires borrowers who weren't paying their mortgage when they sold their house to wait three years before they can qualify for a home loan. That time penalty may be waived in certain cases, including long-term job loss.
There is no FHA time penalty for homeowners who made their house payments in the 12 months before their short sale.
The size of a down payment can also shorten the waiting period.
A down payment of 20 percent or more will cut Fannie Mae's time penalty on a borrower with a short sale down to two years from seven. Buyers who put down 10 percent can qualify after four years.
It's no longer just a waiting game for homeowners caught up in the earliest stages of the foreclosure crisis in 2007 and 2008.
There's still the impact that a foreclosure or short sale has on one's credit score -- still very much a factor in qualifying for a loan.
Like most credit blemishes, foreclosures and short sales will remain in your credit history for seven years.
As a general rule, the higher your FICO score, the more it will drop as a result of a bad debt, said Barry Paperno, consumer affairs manager for MyFICO.com, the consumer website for FICO.
FICO credit scores range from 300 to 850. In simulations, a foreclosure sent a FICO score of about 720 down to as low as 570 and took about seven years to recover fully, assuming everything else was equal.
Still, there are steps one can take to burnish one's tarnished credit rating:
• While in the foreclosure penalty box, make sure to pay all your bills on time.
• Get more credit. This may sound counterintuitive after a foreclosure, but beefing up your track record of good credit accounts can help boost one's credit score. A car loan or a credit card will do. But if you get a credit card, pay it off every month.
• Be patient. A foreclosure's drag on your credit score will decline over time.
• Dispute any mistakes on your credit report, which can lower your score.
• Don't close your oldest credit accounts. Your score gets a boost from older credit lines.
• Scale back your lifestyle and pocket the savings toward a future down payment.
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