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In most cases, borrowers whose homes have been foreclosed must go through a waiting period before a lender will approve them for a new mortgage. Waiting periods vary depending on the type of loan you’re seeking and whether there were extenuating circumstances related to the foreclosure.
The biggest hurdle a borrower must overcome is the damage a foreclosure does to a credit report, which can stay on a record for up to seven years.
However, with time and the right repair strategies, it’s possible to get a new mortgage and become a homeowner again.
How Foreclosure Impacts Your Credit
A foreclosure will seriously damage your credit score, reducing it by as much as 150 points or more. In many cases, a foreclosure also triggers other negative credit impacts associated with unpaid bills.
For example, missing a credit card payment for 30 to 90 days or more can reduce your FICO score by up to an additional 100-plus points or more. Also, the biggest drop in FICO scores occurs for those whose credit was previously unblemished.
FICO credit scores range from 300 to 850. Most mortgage lenders require at least a 620 to 660 score to qualify for a loan, and the higher your score, the more favorable the loan terms will be.
Foreclosures and late payments stay on your credit report for seven years. But their impacts start to lessen after two years in most cases. That’s why it is essential to be diligent and pay your bills promptly after foreclosure.
The terms won’t be all that favorable, but you may be able to qualify for a new mortgage if your FICO score rises to the low 600s within a couple of years. For example, some lenders may approve FHA loans with credit scores as low as 620 and possibly lower with a larger downpayment.
Unless you’re in a hurry to be a homeowner again, waiting for your score to recover before you apply for a new loan may make sense.
In cases where a foreclosure option is voluntary, consider pursuing a short sale or deed-in-lieu instead. Short-term credit impacts are still the same, but these are not as egregious and may provide a quicker path back to homeownership, depending on the lender.
How Long Do You Need to Wait?
Waiting periods differ for various kinds of loans after foreclosure.
The other big factor is if a borrower can prove extenuating circumstances that contributed to the foreclosure. For example, if a spouse died and they were the primary financial provider for a household, you went through a divorce or serious illness, a lender may take that into consideration.
However, when attempting to borrow for a new mortgage, you’ll still need to show that you’ve recovered from your extenuating circumstances and are a viable risk candidate for a new loan.
After a foreclosure, it can take you as long as seven years to get a conventional loan that mortgage market-makers such as Fannie Mae or Freddie Mac will buy. However, this can be shortened to as little as three years if extenuating circumstances led to foreclosure.
Conventional loans aren’t backed by the federal government and typically require a minimum 620 credit score and a 3% down payment to qualify. However, you might be required to put down more than the minimum if you qualify for the shortened waiting period due to extenuating circumstances.
The maximum loan-to-value (LTV) ratio allowed is 90%, which means you’ll need at least a 10% down payment.
You must wait three years to get a loan backed by the Federal Housing Administration (FHA). The waiting period begins when the foreclosure case ends, which usually coincides with the sale of the foreclosed home.
That waiting period may also be shortened if you prove extenuating circumstances beyond your control.
Home loans backed by the FHA require a 580 credit score and a minimum 3.5% down payment, but you may qualify with scores as low as 500 to 579 if you put at least 10% down.
For veterans and active duty military members, the Department of Veterans Affairs (VA) requires just two years between foreclosure and shopping for a new loan.
In most cases, there’s no down payment required, but lenders want to see a minimum 620 credit score.
You’ll get a home loan entitlement if you qualify for a VA loan. This is the maximum amount the VA guarantees it’ll pay the lender in case of default.
It’s possible for veterans to lose part of their entitlement in foreclosure but still have a portion to use going forward. In other cases, if a servicemember had a foreclosure on a VA loan to begin with, they may not be eligible for another one.
These loans are backed by the U.S. Department of Agriculture (USDA). This zero-down-payment program applies to rural homebuyers with low to moderate incomes and requires a 640 credit score for automatic approval.
USDA loans have a waiting period of three years to qualify if you have a foreclosure in your credit history.
Nonqualifying Mortgage Loans
These are also known as nonprime or non-qualified loans and don’t follow a set of rules established by the Consumer Financial Protection Bureau to protect borrowers. The upside is that you can probably get another mortgage loan immediately following foreclosure with different eligibility criteria than qualified mortgages.
However, these loans are riskier than others and are characterized by balloon payments, negative amortization, and high-interest rates and fees.
» MORE: See today’s refinance rates
Steps You Can Take During the Waiting Period
If you have plans to own a home again after your foreclosure, credit repair should be your top priority. You may have the urge to start shopping immediately for another mortgage, but in most cases, it’s better to put this off for a while. Any mortgage you qualify for early in the process will have higher interest rates and other unfavorable terms that could put you in a financial bind again.
For the first 24 months following foreclosure, you should reposition your finances to give you the most favorable terms when you shop for a new mortgage. Find ways to rebalance your finances, eliminate unnecessary expenses, save money, and improve your credit score.
Divert funds where you can into debt reduction and funding a down payment.
Monitor your credit report regularly, at least once every couple of months, and clean up any other reporting errors that may be working against you. Lenders want to see a dependable track record and you can do this by isolating your foreclosure blemish.
If you’re unorganized, set up automatic payments for your regular accounts to ensure nothing gets overlooked. You might also consider obtaining a secured or gas credit card.
Charge small purchases and then pay them off in a few months. Do this repeatedly to prove that you can handle your credit responsibly. Also, try to negotiate for lower interest rates on your existing credit cards.
When You’re Ready to Shop for a New Mortgage
If you stick to your budget, pay your bills on time, and diligently save for a downpayment, you’ll create a track record that will improve over the long haul.
When you’re ready to shop for a new mortgage, it’s critical to comparison shop. Not all lenders have the same underwriting standards, and some may still get hung up on your foreclosure.
The biggest hurdle to getting a mortgage after foreclosure is recovering from the significant hit to your credit score, which lasts several years.
The only way to ensure you get the best rate is to research several prospective lenders. If you don’t like what you find or don’t qualify, keep moving forward with your budget plan.
Continue to keep close tabs on your credit reports from Equifax, Experian, and TransUnion. Review them for errors, which are common and can include:
- Credit card or loan payments applied to the wrong account
- Duplicate accounts showing up on your report, leading lenders to believe you have more open credit lines and debt than you do
- A former spouse’s debt appearing on your report after divorce
You can access your credit reports from the three bureaus at AnnualCreditReport.com, and you’re entitled to a free copy of each bureau’s report once per year.
What About Getting a Mortgage After Bankruptcy?
Qualifying for a mortgage after bankruptcy is similar to qualifying with a foreclosure or a short sale. You’ll be subject to similar waiting periods with the added overlay of whether you filed for Chapter 7 or Chapter 13 bankruptcy.
This process can take up to four years or more unless you shop for a nonqualifying loan.
Bankruptcy can wipe out many of a borrower’s debts while holding other creditors at bay but it is a last-ditch effort when dealing with a crushing debt load.
You may have to give up many of your current assets, such as savings and certain investments, in the process, and bankruptcy will remain on your credit report for ten years. However, it might make sense to declare bankruptcy to hold on to a home in which you’re emotionally and financially invested.
Most homeowners who resort to bankruptcy to avoid foreclosure will file a Chapter 13 bankruptcy. A Chapter 13 doesn’t wipe out the debt and only temporarily shields debtors from their creditors until a court-ordered repayment schedule can be worked out.
After filing for a Chapter 13 bankruptcy, all debt collection efforts stop for several months during a forbearance period. This is when a court works out terms for repaying the debt and sets up a schedule over three to five years over which the debtor the debt owed.
For Chapter 13 to successfully avert a foreclosure, a homeowner must be able to pay off the arrearage while resuming their original mortgage payments. This can be challenging, and if the terms aren’t met, the home will fall back into foreclosure again.
It may be possible to work out a loan modification as part of the bankruptcy to reduce the ongoing mortgage payments so the homeowner can more readily handle the burden of paying both the mortgage and arrears.
A Chapter 7 bankruptcy is rarely useful in avoiding a foreclosure or loss of other secured property. That’s because while a Chapter 7 can wipe out unsecured debts, secured debts are tied to a specific asset, such as a mortgage secured by a home, which reverts to the creditor in a Chapter 7.
If a homeowner has decided to surrender their home through foreclosure, a Chapter 7 may be useful for doing away with potential claims by secondary lienholders, such as in the case of a home equity loan or second mortgage.
Foreclosure May Not Cancel Your Debt
You fell behind on your mortgage payments and lost your home to foreclosure. That’s the end of this financial nightmare, right? Not necessarily. A deficiency judgment could haunt you in states where this legal process is allowed.
Your lender might have lost money when it sold your home through foreclosure. Say you owed $400,000 on your mortgage loan, but your lender could only sell your home for $300,000.
This means that your lender is short $100,000. If you live in a state where deficiency judgments are permitted, your lender could sue you for the $100,000 shortfall.
How likely is it that your lender will file a lawsuit against you? Not surprisingly, there’s no simple answer to that question.
It mostly depends on how big of a loss your lender took on your home’s foreclosure sale and whether you had legal help to negotiate relief from deficiency judgments before your lender officially took over your residence through foreclosure.