Getting a mortgage after a foreclosure can be challenging. However, it’s possible to rebuild your finances and put yourself in a position to buy a new home.
While the idea of applying for a loan may seem daunting after a recent foreclosure, you may very well qualify for another mortgage. Getting a mortgage after a foreclosure depends on the circumstances of your situation — in addition to how you have used your credit since the foreclosure took place.
What is Mortgage Foreclosure?
A mortgage foreclosure involves the lender taking possession of the property once the home loan has been delinquent for several months. Missing property taxes can also result in a foreclosure. The legal process generally starts between three and six months after the first missed payment unless the borrower reaches out to the lender to make other arrangements.
After recouping the property from the previous owner, the lender will generally sell it to recover at least a portion of what’s owed. The lender will hold a public auction that attracts aspiring homeowners who want the property. The initial bid will likely be a lower price than the property’s market value.
The purchase price will likely be higher than the asking price. First-time homebuyers, real estate investors, and corporations can bid on these properties, with the highest bidder receiving the home. Banks prefer to get rid of these homes so they don’t have to deal with extensive repairs and other potential problems. This property will become a bank-owned foreclosure if no one bids on the property.
Foreclosures happen quickly and are short sales. That means the property is sold “as is.” A buyer looking at a foreclosure home will not have enough time to do a home inspection.
How Mortgage Foreclosures Affect Home Ownership
Unfortunately, mortgage foreclosures can make it challenging to pursue your home ownership dreams in the future due to the impact they have on your credit score. They linger on your credit report for up to seven years, and the initial drop in your credit score can be drastic. The good news is your score will start to rebound as time progresses, assuming you properly manage all your other outstanding debt obligations.
A lower credit score can make certain loans more difficult to access. You will also have to contend with a higher interest rate on your mortgage loan. However, you still have choices. Government agencies like the FHA and VA offer competitive interest rates and are relatively good deals for people who don’t have the best credit scores.
Is It Still Possible to Get a Mortgage After a Foreclosure?
It’s possible to get a mortgage after a foreclosure. Mortgage lenders will look at your credit score, debt-to-income ratio, and other factors when assessing if you can buy a property. You can also look at the foreclosure market and see if you can find a foreclosed property that is below market value.
Some non-QM lenders will give you capital right away if you fulfill their requirements. It is a good idea to focus on rebuilding your credit and look for opportunities to grow your income leading up to a mortgage application, especially if you aren’t in a rush to get a mortgage.
How Long Do You Need to Wait to Apply for Another Mortgage?
When getting a mortgage after a foreclosure, the waiting period depends on the type of loan and the lender’s requirements. Generally, conventional mortgages have a waiting period of seven years for applicants who have experienced foreclosure. However, the U.S. Department of Agriculture and the Federal Housing Administration (FHA) require a much shorter wait time of just three years. If you are a veteran, you may be eligible for a VA mortgage even if you have experienced a foreclosure as long as two years have passed since. It’s important to consider the waiting period when planning to apply for a mortgage after a foreclosure.
Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac conventional loans are popular for traditional home purchases. They come with waiting periods of up to seven years after a foreclosure. However, you may be eligible for a shorter waiting period of just three years if the foreclosure was caused by an illness, termination of employment or adverse credit reporting.
FHA Loans
The waiting period for FHA loans, which are backed by the U.S. Federal Housing Administration, is three years from the date that the sale of the foreclosed home is complete. However, it’s possible to qualify for a reduced waiting period in certain circumstances.
VA Loans
If you’re currently enrolled in the armed forces, you’re subject to a waiting period of two years per the U.S. Department of Veterans Affairs (VA). Some spouses of former and active military members are also eligible.
USDA Loans
USDA loans, which are backed by the U.S. Department of Agriculture, also have a waiting period of three years following a foreclosure.
Non-qualified Mortgages (Non-QM)
The wait times for non-qualified mortgages vary for each lender. It’s possible to get a loan without waiting, while other lenders may have short waiting periods after the foreclosure process concludes.
Things to Consider About a Mortgage After Foreclosure
Potential buyers should consider these factors before looking at a foreclosed house.
Some Lenders Will Make Exceptions for a Mortgage After Foreclosure
Candidates can reduce the time they need to wait by proving the foreclosure resulted from a major financial hardship from which they have since recovered. Layoffs, business failures, and major health issues are typically considered legitimate reasons.
The FHA, in particular, is very specific about what they believe to be a significant financial hardship. Events such as illness or death of a loved one meet their criteria in most cases, but circumstances like divorce may not. Whatever you claim, make sure to provide documentation of the hardship — for example, copies of paid medical bills or your spouse’s death certificate.
Therefore, there is still a chance that you may reduce the time to qualify for a mortgage after a foreclosure.
Prove that You Have Recovered from the Hardship
It is essential to rebuild your credit as it is a key factor in your financial recovery. When applying for a loan, lenders want to be confident that you can pay it back, and having good credit is a strong indication of your financial stability. Put simply; lenders are not willing to take a risk on someone who may not be able to repay the loan.
To increase your chances of being approved for a new mortgage, you should document everything, including your pay stubs and tax returns. Potential borrowers who have recently gone through foreclosure need to show that they have recovered from the event that caused the default. This includes proving that they are paying their monthly bills on time and keeping their credit utilization ratio low. Additionally, they must show that their credit score has improved since the foreclosure.
Consider Applying for an FHA Loan
Insured by the federal government, FHA loans are among the best options for foreclosed-upon mortgage applicants. While large banks such as Bank of America and JPMorgan Chase require high credit scores for candidates to be approved, smaller banks are often much more lenient. FHA loan programs vary from state to state, but consistent eligibility requirements include a debt-to-income ratio of less than 43% and a minimum credit score in the 500-580 range. These loans also require a 3.5% down payment.
Tips for Getting a Mortgage After Foreclosure
Even if a recent foreclosure wreaked havoc on your credit score and overall financial health, you don’t have to give up on your dreams of owning another home. Instead, take these actions to help increase your chances of being approved when you’re ready to purchase again.
Review Your Credit Report
Visit AnnualCreditReport.com and request free copies of your credit reports from the three major credit bureaus – Experian, TransUnion and Equifax. Review each page of the reports and highlight past-due or collection accounts. Then, make a plan to bring past-due accounts current, and reach out to your lenders or creditors to negotiate a pay-for-delete arrangement for any collection accounts. Also, make a note of any errors you find and file a dispute with the appropriate credit reporting agency promptly to have the incorrect information removed.
Improve Your Credit Score
To improve and raise your credit score, you need to know how it’s calculated. The FICO score, which is used by 90 percent of lenders and creditors to make lending decisions, is made up of five components:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
You can boost your credit score by making timely payments each month since payment history is the largest factor in the credit scoring equation. Also, bring any past-due accounts current or work with creditors to come up with a payment arrangement to avoid adverse credit reporting.
Other ways to improve your credit score include refraining from closing old credit accounts to avoid shortening your credit age and maintaining a profile of both revolving and installment (i.e., loans) accounts. Plus, you should only apply for new credit as needed since each application you submit results in a hard credit history that can drop your credit score by three to five months. Creditors and lenders often frown upon too many hard inquiries in a short period.
Reduce Your Debt
It’s also best to keep balances on revolving accounts (i.e., credit cards) at or below 30 percent – 10 percent is even more ideal. So, if you have three credit cards with $1,500 limits, try to keep the balances at or below $1,350.
Re-establish Income
Creditworthiness plays an important role in whether you’ll qualify for a mortgage, as it shows lenders how you handle debt obligations. They also want to know that you have the means to afford the monthly mortgage payments, which is why it’s vital to have a steady source of income from a stable job.
Save What You Can
It’s also likely that you’ll need reserves when applying for a mortgage after foreclosure. So, revisit your spending plan and identify ways to free up funds to stow away in your emergency fund. That way, you’ll have a sizable amount saved when it’s time to apply.
Research Your Loan Options
You can choose from many loans, such as FHA, VA, USDA, and conventional loans. Some mortgage lenders offer each of these financial products, but some are better suited for your financial situation than others. Looking at various lenders’ websites for educational purposes and comparing offers can help you feel more confident when it’s time to buy a foreclosure property.
Find a Lender Based on Your Needs
Do your homework to identify lenders that offer the type of home loan you’re considering. They should also be open to working with borrowers with past foreclosures and have the experience necessary to navigate challenges that may come up during the underwriting process.
Conclusion: Buying a House in Foreclosure
Getting a mortgage after foreclosure is no small feat. It is a daunting process for those who are still grappling with the experience of having their home foreclosed upon. With a positive outlook and the proper steps toward financial recovery, getting another mortgage is definitely within reach.
If you are considering buying a house after foreclosure or have been turned down by traditional lenders, Angel Oak’s non-qm home loans could be the solution you need. They can help you as long as 2 years have passed from your foreclosure and you have a credit score of 600 or more. They also offer home loan options for self-employed borrowers, those without W2s, and even those with no proof of income. Their team of experienced mortgage professionals can help guide you through the process and find the right loan for your unique needs. Contact Angel Oak today to learn more about their loan options and start your journey toward owning the home of your dreams.
