After the financial crisis hit the nation back in 2008, hundreds of thousands of families lost their homes to foreclosure. In fact, foreclosure filings skyrocketed over 81% that year compared to the year before.
Getting approved for a mortgage is tough enough these days for any borrower, but it can be a lot more challenging with a foreclosure on the record.
But all is not lost. Becoming a homeowner again after suffering through a foreclosure is possible, though a number of hurdles need to be overcome first in order to obtain another mortgage and get back into the market.
And the length of time that you’ll need to wait to put your name back on title will depend on the precise loan that you’re after.
Preparing For Homeownership
Before you plan on applying for another mortgage, there are a few tasks that need to be ticked off your checklist first. It should be noted that a minimum three-year waiting period will need to elapse following a foreclosure. The clock starts from the actual date that the foreclosure was completed, not when you were notified that you had to vacate your home.
Since you’ll likely be required to put a minimum 10% down payment towards any new purchase you make, now’s the time to start saving every penny possible. This is typically the most challenging thing for homeowner hopefuls to do, especially when mounting debt is present that requires attention. Lenders will want to be certain that you won’t default on your loan again, so the more money you can put towards the purchase – and ultimately reduce the loan amount – the better.
Your credit score plays a key role in your ability to get approved for a loan, so do what needs to be done to improve it. Get a hold of your credit report to see if there are any errors that are bringing your score down. If so, request an investigation to get those mistakes wiped off your report. In the meantime, make sure any debt payments you’re responsible for are made in time and in full each month, and don’t take out any additional loans for large purchases.
Make a trip to your mortgage lender to discuss your options, and apply for a mortgage pre-approval. This will help you narrow down the price range of homes that meet your specific budget, which will help save you and your real estate agent in the home searching process. Your loan specialist will let you know at that time if there are any other things you need to do to boost your chances of mortgage approval.
If you intend on applying for a conventional mortgage, the wait time following a foreclosure will vary from one lender to the next. You can expect to have to wait any time between two to eight years, or even longer in some situations. Some lenders may slash the waiting period, as long as they are confident that you have a considerable down payment saved up (often 25% or more). They’ll also likely tack on a higher interest rate, and subject you to more stringent credit and debt-to-income criteria.
Unlike conventional mortgages, FHA loans – those that are backed by the Federal Housing Authority – are the most lenient of loan programs for those who have undergone foreclosure in the past. A minimum of three years must pass following foreclosure before being eligible for these types of loan, which begins when the foreclosure case ended. However, if the foreclosure involved an FHA loan, the waiting period begins on the date that the FHA paid off the previous mortgage lender on the claim.
While the traditional wait period before being able to apply for an FHA loan has been three years, recent changes in the agency’s regulations have made it possible for FHA loans to be approved as early as one year after the completion of foreclosure. The caveat is that you’ll ned to prove that a financial situation outside of your control led to the foreclosure. This would include a medical problem or job loss that slashed your income by at least 20% over a six-month period.
Fannie Mae & Freddie Mac Mortgages
Before applying for a Fannie Mae or Freddie Mac loan, a minimum of seven years needs to pass following the completion of foreclosure. However, like FHA loans, there are exceptions. You might be able to cut back the waiting period down to three years if certain requirements are met.
For starters, if you can prove that the foreclosure was caused by circumstances outside of your control, you may be able to shorten the wait period. This may also be possible if you can show that the maximum loan-to-value ratio of your new mortgage is 90%, or is the LTV ratio specified on Fannie Mae’s loan eligibility matrix – whichever of the two is higher.
The Bottom Line
Climbing out of the financial distress of foreclosure may be tough, but it’s still possible to become a homeowner once again. Depending in the type of loan you are considering, the wait times will vary. Your best bet is to hunker down and get your financial life in order, sit down with a mortgage specialist, and determine which loan type is ideal for your particular financial situation.