If you’ve been through a foreclosure, you’ve crawled through one
of the worst real estate ordeals there is. But that experience doesn’t mean
homeownership has to remain forever out of reach afterward.
In fact, it’s much easier to qualify for a mortgage after a
major credit event than you may think. It all depends on the circumstances of your foreclosure—and how
you’ve managed your credit since.
So if you want to get back out there, here’s how to get a
mortgage after foreclosure.
How long
after foreclosure can I apply for a loan?
When it comes to the necessary waiting period
between going through a foreclosure and applying for a new loan,
every mortgage program is a bit different. But there are some general
rules.
“For a conventional
mortgage, a borrower who experienced foreclosure is required to wait seven
years,” says Ray Rodriguez, regional sales manager at TD Bank.
On the other hand, the Federal Housing Administration and the
U.S. Department of Agriculture require a three-year waiting period while the U.S. Department of Veterans Affairs requires
a two-year wait.
How to speed up the
process
You can reduce the waiting period for landing a new
mortgage by showing that the foreclosure was the result of a
significant financial hardship from which you have recovered.
So what’s considered significant? “I live to
shop” definitely doesn’t count; legitimate reasons include a
layoff, business failure, divorce, or major health problems.
Be prepared to provide documentation of the hardship you
claim, such as proof of paid medical bills.
“You’ll need to provide an explanation letter, which should be
short and focus on recovery from the event, rather than excuses for it,” says Casey Fleming,
author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Her sample sentence: “After my business failed, I landed a W-2
job with an excellent company doing the same thing I did before, but with a
guaranteed salary and full benefits package.”
Just keep in mind that “there is no one-size-fits-all when
it comes to lenders dealing with this situation,” says Rodriguez. Every lender
has different requirements aside from basic guidelines set down by the
FHA, VA, USDA, Fannie Mae, and Freddie Mac.
The FHA, for instance, is particular about what constitutes a
significant financial hardship, says Fleming. A serious illness or the death of
a wage earner may be acceptable, whereas divorce may not be. (You might
have been able to work through a divorce, but not through illness or a
death.)
How to rebuild your
credit
For a potential borrower, a major component of landing a
new mortgage is demonstrating that you have bounced back from the
financial hardship that caused you to default in the past. Job one of
proving that is rebuilding your credit and keeping it sparkling clean.
To boost your credit score—lenders typically like to see a
score of at least 580—pay bills on time and maintain low balances on credit
cards.
“Consumers should also frequently check their credit
reports to ensure there are no inaccuracies that could negatively affect
their chances of qualifying for a loan,” say Rodriguez.
Keep a paperwork file
Be prepared to document everything finance-related in your
postforeclosure life, advises Rodriguez. That includes pay stubs, bank and
brokerage statements, and tax returns. Lenders will ask for this paperwork
to verify everything you put on your mortgage application as a precaution to
avoid another potential foreclosure.
And save your pennies! Unless you’re using VA
financing, you will probably need a larger down payment to secure a
mortgage than you may have put down last time.
“Figure 10% minimum,” says Fleming. There may be exceptions, but
they are rare.
What about nonprime
lenders?
You can land a new loan immediately after completion of the
foreclosure in most cases. But beware: It’s expensive, the fees and interest
rate are higher, and usually the terms aren’t great, Fleming says. For
instance, rather than a 30-year fixed loan, you may be offered only an
adjustable-rate mortgage with a high margin.
How a mortgage adviser
can help
Meet with an experienced mortgage adviser soon after your foreclosure so that
you can begin to work on any other long-term issues that need to be addressed
and fixed.
“The three legs of the qualifying stool are income, credit, and
assets,” says Fleming. If one or two are weak, you’ll pay more for a loan or
may not qualify. The best corrective action for a prospective home buyer
depends on what leg is weakest.
Once you’ve worked on getting your credit score over a
particular threshold, you may need to conserve cash if your liquid reserves are
too low, or pay down your credit cards if your debt-to-income ratio is too
high.
Bottom line: Your past does not predict your future when it
comes to financing—in fact, a bad experience can often scare people straight.
“Many
folks have rough times in their financial life, and then are excellent credit
risks afterward,” says Fleming. “If you can demonstrate a willingness and
ability to make payments in the future, you can get a loan to buy a home.”
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