How to Get a Mortgage After Foreclosure
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Getting a mortgage after foreclosure can seem like an impossible feat, especially with the severe damage it causes to your creditworthiness.
The good news is you can eventually own a home again — usually after three to seven years. You’ll just need to practice patience and implement some healthy financial habits to make it happen.
How to get a mortgage after foreclosure
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. There’s usually a waiting period before you can buy a home again, and each loan program has its own guidelines.
|Home Loan Program||Foreclosure Waiting Period|
|Conventional loan||3 to 7 years|
|FHA loan||3 years|
|VA loan||2 years|
|USDA loan||3 years|
Conventional loans aren’t backed by the federal government and typically require a minimum 620 credit score and 3% down payment to qualify. The conventional foreclosure waiting period is typically seven years, though it may be shortened to three years in extenuating circumstances. Examples of this might include:
- Expensive medical emergency
- Sudden job loss
Note: With a conventional mortgage, you might be required to put down more than the minimum for your home purchase if you qualify for the shortened, three-year 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.
Home loans backed by the Federal Housing Administration (FHA) require a 580 credit score to make the minimum 3.5% down payment. You may qualify with scores as low as 500 to 579, though, if you put at least 10% down.
The FHA foreclosure waiting period is three years and applies to both a foreclosure and a deed-in-lieu of foreclosure, according to the U.S. Department of Housing and Urban Development (HUD).
The U.S. Department of Veterans Affairs (VA) guarantees VA loans for eligible military borrowers. In most cases, there’s no down payment required, though lenders may expect to see a minimum 620 credit score.
The VA foreclosure waiting period is two years.
USDA loans are backed by the U.S. Department of Agriculture’s Rural Housing Service. The zero-down-payment program caters to rural homebuyers with low to moderate incomes and requires a 640 credit score for automatic approval.
USDA foreclosure guidelines require a three-year waiting period.
How foreclosure impacts your credit history
The biggest hurdle to getting a mortgage after foreclosure is recovering from the significant hit to your credit score, which lasts for several years.
Let’s say your credit score was approximately 780 before the foreclosure. Your score could drop by as many as 160 points, to 620, after the foreclosure hits your credit report, according to data from FICO. If your score was around 680 before the foreclosure, it could drop to 575, dramatically limiting your mortgage options.
4 ways to prep for a mortgage after foreclosure
Whether you’re just at the beginning of your waiting period or somewhere in the middle, keep the following tips in mind to boost your chances of buying a house after foreclosure.
1. Check your credit reports for errors
Pull your credit reports from each of the three major credit reporting bureaus — Equifax, Experian and TransUnion — and review each of them for errors. Common credit report errors, according to FICO, 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 actually do
- A former spouse’s debt appearing on your report after a divorce
You can access your credit reports from the three bureaus at AnnualCreditReport.com, and you’re entitled to one free report from each bureau weekly through April 2021. If you find any errors, reach out to both the institution that reported the error and the credit agency showing that information.
2. Pay your bills on time
Your payment history generally accounts for the biggest chunk of your credit score — 35%. Lenders pay close attention to whether you pay your monthly debts on time and use that information to assess whether you’re a creditworthy borrower.
The following considerations are factored into the payment history portion of your credit score:
- How long your payments were late
- How recently you were late
- Your past-due balances
- The number of past-due accounts you have
Establish and maintain on-time payments for your current bills to start building a healthier history and score.
3. Reduce your outstanding debt
Your debt-to-income (DTI) ratio — the percentage of your before-tax 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 approving you for a home loan.
Pay down your outstanding debt to increase your chances of a mortgage approval. As a general rule of thumb, your total DTI ratio, including your new mortgage payment and all monthly debts, shouldn’t exceed 43%.
4. Save, save, save
You’ll need cash for your down payment and closing costs, plus other line items like homeowners insurance, homeowners association fees, 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, which you can use instead of taking on more debt. Avoid depleting your savings when you do buy a home again, so you have a financial cushion if you fall on hard times.