From the financial collapse of 2007 through the end of last year, more than five million American families have lost their homes as a result of foreclosure.
If you’ve lost your home to foreclosure, you may worry you’ll never have the option of purchasing a home again! Fortunately, that’s not the case.
Your credit will definitely be affected after your foreclosure, but you may be able to qualify for another mortgage after some time passes, depending on circumstances. If you lost your home like so many others at the height of the financial crisis, your credit score and your potential to qualify to purchase a new home are already looking better.
If you’ve lost your home only in the past few years, you may face a longer wait and some added wrinkles. So, let’s discuss: just how long may you be waiting, and what can you do to better your chances of moving into a new home as soon as possible?
If you’ve recently lost a home to foreclosure but are looking to buy again, real estate and mortgage brokers have a name for you: boomerang buyer.
While this might seem like it could have negative connotations, what the label says to lenders and sellers is that you’ve been there before. Not only have you owned a house and been through all the processes that entails, you’ve also experienced the worst the market can throw at you.
And after all that trouble, you’re still interested in owning a home. This means you might be more trustworthy at the end of the day than someone looking to purchase a home for the first time.
How Long After Foreclosure Can I Buy a House?
As a boomerang or rebound buyer, the most common penalty you’ll have to deal with is an often lengthy waiting period. But, because these periods vary from lender to lender, you might not be so sure of how long exactly you have to wait.
There is, however, an easy rule to follow: the longer you wait before trying to purchase another home, the better your options will be.
Your waiting period typically begins immediately after your foreclosure is finalized.
When lenders check your credit, they’re often looking only at the last two years of your credit history. Foreclosures may not be erased from your credit report for 7 years, but lenders will pay less attention to it as time goes by. In the first two years, your credit score is dropped by 100 points or more but will start to make a recovery thereafter.
Improving Your Credit Score
If you want to greatly increase your chances of being able to purchase a home again sooner rather than later, do everything in your power to increase your credit score.
Taking out credit cards (and using them wisely) and always paying them off when payment is due can raise your score. So can installment loans. Regardless of what sort of credit option you choose, be sure that it’s being reported to each of the three credit bureaus every month.
If you have outstanding debts, pay them off as soon as possible. If you can establish a history of paying all of your bills on time, the foreclosure will appear on your credit as merely a single negative item. If it is not paired with numerous other negative hits to your credit, it will do far less damage to your chances of qualifying for a mortgage.
Which Mortgages are Most Forgiving?
When applying for a new loan after your foreclosure, the type of mortgage you’ve chosen matters greatly. If the mortgage is backed by the government, from Freddie Mac or Fannie Mae, then you’re forced to wait for 7 years, unless:
- You can prove in writing that the foreclosure was the result of extenuating circumstances.
- You show that the maximum loan-to-value of the new mortgage meets the LTV ratio listed in Fannie Mae’s eligibility matrix or is 90 percent.
- You are using the new mortgage for the purchase of a personal residence or a limited cash-out refinance.
The seven-year waiting period only applies to loans that are sold to Fannie Mae or Freddie Mac – it doesn’t apply to those that are insured through the FHA.
The most forgiving loans are definitely through the FHA. With a normal required waiting period of only 3 years, Federal Housing Administration loans may also allow buyers to rebound in as little as a year under some circumstances, such as:
- Death in the family or serious illness
- Job loss
Some of the large banks involved in the financial crisis of 2007, like Wells Fargo & Co and SunTrust Banks Inc. initially responded with higher credit requirements and unblemished credit histories, which served to exclude all but the safest possible buyers.
But, as the years have passed and the market has recovered, these same lenders are easing credit access. And smaller lenders – those who had less of a hand in the market fluctuations that affected so many millions – have taken advantage of the vacuum left by the big banks and have been much more likely to grant mortgages to less creditworthy borrowers.
If your foreclosure was the result of a bankruptcy, different guidelines may be applied to you – it all depends on your lender’s rules. Some lenders may recognize that the foreclosure was the result of the bankruptcy and disregard it as at the point of the foreclosure you were no longer legally responsible for your mortgage debt.
Fear not, you won’t be assessed a longer waiting period as a result of both your bankruptcy and foreclosure stacking up as penalties. You’ll typically only be penalized for one or the other.
However, if it’s your credit you’re relying on to qualify for purchasing another home, that’s a different story. A bankruptcy leading to subsequent foreclosure can have pretty serious impact on your overall score. One of the best ways to combat a poor credit score is to have a considerable down payment – as much as 30 percent in some instances, according to CNN Money.
If you surrendered your home through a deed in lieu of foreclosure or sold your home in a short sale, your waiting period will only be 2 years. Or, if you can demonstrate that the circumstances that led to your foreclosure were beyond your control, you may be more easily able to qualify for a new loan after 3 years with a down payment of at least 10 percent.
Additionally, mortgages with variable interest rates will be up to the individual lender.
If you’re in the market for a new home and wondering how long you have to wait after foreclosure to buy a house, don’t stress. If you do your homework, you’ll be in a new home faster than you might have thought possible after your foreclosure.
If you still have questions about how you can enter the market again or want help buying a new home in the Killeen/Austin areas, contact me today by texting or calling 254-258-0777!