Recovering From a Distressed Property – When Is It Right to Buy Again?

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Now that we are a few years into the devastating effects of our housing market crash and subsequent economy breakdown, things are starting to change for many past homeowners of distressed properties. Mortgage holders with properties they could not keep up with ended up facing serious consequences and either had to do a short sale or watch their home be taken back by the bank.

Still, the desire to become a property owner once again remains with most people. Foreclosures and short sales have a strong impact on the credit outlook of homeowners, in that the ability to purchase a home again is severely hampered if not entirely hindered for some time.

Buying After a Short Sale

Short sales are sales that the bank approves despite the mortgage holder owing more on the property than what it is worth. It used to be a process that would take as much as one year or more in some cases. But now, banks have streamlined their process and worked to make it easier on the homeowner. To save expensive legal fees involved in the foreclosure proceedings, some banks are even offering some cash back incentives to short sale sellers. Still, the impact on credit is unavoidable. The typical wait time between a short sale and the ability to buy another home is about two years. But one must be prepared leading up to the purchase.

Buying After a Foreclosure

Just like a short sale, when a property goes through the foreclosure process there are some heavy implications on the original owner’s credit score. To offset that it takes at least fives years of rebuilding credit before banks will even consider an application to lend again. Depending on the circumstances of the foreclosure it could be longer. The best thing a homeowner that wants to buy again can do is to work diligently at preparing for the purchase while working to repair the damaged credit.

How To Prepare for the Next Purchase

When should someone that has gone through a short sale or foreclosure begin getting ready for the next purchase? The answer is: from the moment of closing on their original property.

Steps to take include rebuilding your credit, securing a stronger financial footing and saving for a down payment.

Advice that we give our clients that have endured a distressed property situation is to immediately begin working on rebuilding their credit. Work to pay off the smaller bills that have high interest rates and then systematically chip away at the larger debts. This will increase the debt to income ratio that lenders like to see at least 35% debt/65% income. Whether through working with a qualified mortgage broker to tackle the necessary aspects of your credit history that need attention, or slowly strengthening your financial profile, it is critical to be financially stable. The goal is to have a credit score that is in the 700s.

The second piece to getting back on track and qualified to buy a home after a short sale or foreclosure is to have enough money on hand to put down a reasonable amount of cash upon sale. Though not necessary in many government-backed loans today, a good down payment provides a bank strong motivation to trust the borrower despite past problems. An ideal amount to save is about 20% of your expected budget. Remember always set your sights on a home that is within your means. Just because a bank might offer a loan that is more than you feel you can afford, does not mean you can afford it. It is important to stick with what you can afford.
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Regardless of your time frame, keep in mind that the government wants you to succeed as a homeowner. There are some rumors going around that there could be some new mortgage programs on the horizon that would allow sellers of short sales to be able to buy a home again within a year with federally backed mortgage loans.

Contact us today to learn more about your options or to discuss the possibility of owning a home again after your short sale or foreclosure ordeal. We are happy to help you!