How to Get a Mortgage After a Foreclosure

If you’re trying to purchase a home after a foreclosure, you aren’t alone. In fact, many who lost their homes during the Great Recession are just starting to re-enter the housing market. If this is the case for you, you may already be qualified to get a mortgage. However, if you’ve lost your home more recently, it may take some time before you can secure another loan.

Once a home is foreclosed, there is typically a seven-year waiting period before you can  qualify for another mortgage. The three major credit reporting firms, Equifax, Experian, and TransUnion, will begin to report your foreclosure as soon as they are informed you have missed your first payment. Three of the most common loans homeowners might consider after a foreclosure include the 7-year conventional loan, the FHA 3-year loan and the VA 2-year loan

However, there are many options for mortgages that have mixed eligibility requirements and  shorter waiting periods. So if your home was recently foreclosed, here are some tips on how (and when) you can get your next mortgage.

After a foreclosure, you’re going to want to start saving money and rebuilding your credit score right away. This is because your credit score is a large determining factor when lenders consider your loan application.

FICO credit scores range from 300 to 850, but lenders usually want a score at least 520. If you have a good credit score, chances are lenders are going to offer you better loan terms.

If your credit score isn’t within that ideal range, don’t panic. Something as simple as being on time with your monthly payments can make a huge difference to your credit score. Even if you only pay the minimum, a missed or late payment would be worse.

Also try to pay off your credit card and keep your balance below 50 percent, so your score is not negatively affected. So stay away from spending on your credit cards until you pay them off, as high amounts of unsecured debt is a red flag to lenders.

In addition to your credit score, your debt-to-income ratio is just as important for your financial health. It’s also a major factor for lenders when determining your eligibility for a mortgage. Your debt-to-income ratio tells lenders how much you can afford and what you are able to borrow. If you want to maintain a good debt-to-income ratio, try to resist any temptations that may increase your debt, such as car or furniture loans.

FHA loans are a great option for homeowners after a foreclosure. This is because is more forgiving than other loan types. However, you can expect a 3-year waiting period after your foreclosure before you can apply. The only way you may have the opportunity to apply for an FHA loan sooner is if you have extenuating circumstances, such as a divorce or death in the family.

Although waiting any amount of time to be able to secure mortgage is frustrating, the FHA loan will cut that 7 year waiting period down in half. This means that you can spend your time rebuilding your credit and finances.

Conventional loans backed by Fannie Mae or Freddie Mac have a 7 year waiting period, but it can be shortened if you have a large down payment (more than 20%) or if there are extenuating circumstances.

Fannie Mae defines extenuating circumstances as “non-recurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.”

Many homeowners have dealt with the difficulties that come with a home foreclosure, but it is still possible to get a mortgage a few years down the line. It’s important to explore all your options and selecting a mortgage that will fit your needs best. Remember that during this waiting period, it’s imperative to start saving, paying off your debt and rebuilding your credit so that you have the best possible chance to secure a home mortgage faster.

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