How to Get a Mortgage After a Foreclosure
Foreclosure rates have been historically low since the housing crisis, but they are still a reality for many homeowners. Although foreclosure filings are down 19% year over year, there was an 8% increase from December 2018 to January 2019, according to the latest data available from real estate research firm ATTOM Data Solutions.
Going through the foreclosure process can be a defeating experience. Not only do you lose your home, but your creditworthiness suffers as well.
The good news: You can eventually own a home again — you’ll just need to practice patience and implement some healthy financial habits to make it happen. Usually it will take 3-7 years before you are eligible to borrow again.
Here’s what you need to know about getting a mortgage after a foreclosure.
How foreclosure affects your credit
The biggest way foreclosure affects your ability to get a mortgage is the significant impact it has on your credit score. Most loan programs have minimum credit scores you must meet to qualify for a mortgage, typically ranging from 580 to 640. A mortgage foreclosure delivers a devastating blow to your credit score that lasts for several years.
Let’s say your credit score was approximately 780 before the foreclosure. Your score could drop by as much as 160 points, to 620, after the foreclosure hits your credit, according to data from FICO. If your score was around 680 before the foreclosure, it could drop to 575.
Additionally, it can take up to seven years to fully recover from a foreclosure judgment. That’s how long the ding on your credit score lasts after foreclosure.
How long you have to wait to buy a home after foreclosure
In addition to the credit score impact, there is also typically a waiting period for people who lost their previous home to foreclosure and want to buy again. Each loan program has their own guidelines.
For conventional borrowers, the waiting period is typically seven years after foreclosure before a borrower is eligible for another loan. However, this period may be shortened to only three years in cases of extenuating circumstances — a sudden loss of employment or incorrect information on a credit report, for example.
FHA borrowers have a three-year waiting period before they can become eligible to take out another FHA loan. The waiting period applies to both a foreclosure and a deed-in-lieu of foreclosure, according to the U.S. Department of Housing and Urban Development.
Borrowers interested in a USDA loan, which is a mortgage backed by the U.S. Department of Agriculture’s Rural Housing Service, must also wait three years.
For VA loans backed by the Department of Veterans Affairs, borrowers have a two-year waiting period after a foreclosure.
|Waiting Period Between Foreclosure and New Mortgage|
|Loan Program||Waiting period|
|Conventional mortgage||7 years|
|FHA loan||3 years|
|USDA loan||3 years|
|VA loan||2 years|
Tips to buy a home after foreclosure
If you’re just at the beginning of your waiting period or somewhere in the middle, consider taking the steps below to boost your chances at homeownership.
Check your credit reports for errors
There could be inaccurate entries on your credit report that are further driving your credit score down from where it stood before your foreclosure. Pull your credit reports from each of the three major credit reporting bureaus — Equifax, Experian and TransUnion — and review each of them for errors. FICO says some common credit report errors 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 actually do.
- A former spouse’s debt appearing on your report after a divorce.
You’re entitled to one free report every year from each bureau and can access them at AnnualCreditReport.com. If you find any errors, reach out to both the institution that reported the error as well as the credit bureau tied to whichever report is showing that information.
Pay every bill on time
Your payment history accounts for the biggest chunk of your credit score, at 35%. Lenders pay close attention to whether you pay your monthly debt obligations on time and use that information to help them determine if you’re a creditworthy borrower.
How long your payments were late, how recently you were late, your past-due balances and the number of past-due accounts you have are all considerations factored into your credit score.
Establish and maintain on-time payments on your current bills to start building a healthier history and score.
Reduce your outstanding debt
Your debt-to-income ratio, or the percentage of your income used to make monthly debt payments, arguably holds a bit more weight than your credit score. It’s a high priority on the list of factors that mortgage lenders scrutinize when determining your eligibility for a home loan.
Pay down your outstanding debt to increase your chances of a mortgage approval. As a general rule of thumb, your front-end (housing expense) DTI ratio shouldn’t exceed 31%, and your back-end (all debt expenses including housing) ratio should be no more than 43%.
Save, save, save
You’ll need cash for your down payment and closing costs as well as other line items like homeowners association fees, insurance, maintenance costs, property taxes and unexpected expenses.
Give yourself some breathing room by saving three to six months’ worth of your living expenses in an emergency fund to avoid incurring additional debt to pay for the aforementioned costs.
Another thing to keep in mind is you might be required to put down more than the minimum for your home purchase. For example, if you qualify for the shortened, three-year waiting period due to extenuating circumstances under a conventional mortgage product, the maximum loan-to-value ratio allowed is 90%, which means you’ll need at least a 10% down payment.
The bottom line
Having a foreclosure mark on your credit report sticks with you for years, but it doesn’t mean you have to throw out all hope of becoming a homeowner again.
Use your waiting period wisely by improving your credit history and building healthy financial habits overall to increase your chances at a mortgage approval when your time comes.