Foreclosure can be a devastating experience. To realize your dream only to have it die may have left you thinking that you will never own a home again. Being able to buy a home after recovering from a foreclosure may just be a matter of waiting. While you’re waiting, it’s important that you are preparing yourself if you want to become a homeowner again. Here are the things you need to know.
There are waiting periods of various lengths required by different major loan programs before you are eligible for a new mortgage. It’s important that you take this time to improve your credit. When the prescribed waiting period is over you will still need to meet the minimum credit score requirements.
For the two major government sponsored enterprises, Freddie Mac and Fannie Mae, the minimum FICO credit score is 620. If your foreclosure was on a conventional mortgage, it was probably owned by Freddie Mac or Fannie Mae.
For an FHA mortgage, you may be eligible for their most attractive 3.5% down payment program if you have a credit score of 580 or higher. If your credit score is below 580, you may still qualify as long as you have a 10% down payment.
Here are the waiting periods for the most popular loan programs and most common circumstances.
7 Years – Freddie Mac and Fannie Mae
From the date that the foreclosure was recorded, Freddie Mac and Fannie Mae require you to wait 7 years until you are eligible for another mortgage.
3 Years – Extenuating Circumstances
If the foreclosure resulted from extenuating circumstances, Fannie Mae allows you to be considered for a mortgage after 3 years. The mortgage may only be a primary residence. No second homes or investment properties are allowed. The borrower must also provide a minimum of 10% down.
What constitutes extenuating circumstances is open to some interpretation, but generally speaking, the situation must be a one time, non-recurring event. Those events could include a divorce, job layoff or a serious medical condition. If you are claiming extenuating circumstances, you must provide documentation such as a divorce decree or a layoff notice. Your lender will submit this with your loan application to Fannie Mae for approval.
2 Years – Military and Veterans
If you are active duty military or a veteran and you had a foreclosure or deed in lieu of foreclosure, you may be eligible for another VA guaranteed mortgage in as little as 2 years. It will likely take at least 2 years to improve your credit to the point where you can meet the minimum required FICO score of 620.
The amount of the loan you can qualify for will also depend on how much is remaining in your VA mortgage entitlement. The VA guarantees 25% of the loan amount up to $104,250 (25% of $417,000). If you had a $300,000 VA mortgage that went into foreclosure, 25% of the loan or $75,000 of your VA entitlement is gone. With $29,250 remaining, the maximum VA mortgage you can qualify for is $117,000.
1 Year – FHA Back To Work Program
Homeowners that had an FHA mortgage and lost their home through foreclosure due to the loss of a job or a reduction in income of 20% or more, are eligible to receive a new FHA backed mortgage in as little as a year. During that year, the borrower must have stayed current on all housing payments (mortgage or rent), had no more than one 30-day late payment and have no credit accounts in collection. The borrower will also have to go through housing counseling before being approved.
Potential borrowers need to document the loss of their job or reduction in income through W-2s, tax returns, and other documentation. Sometimes the process can be delayed because the bank does not take title to the foreclosed property for years. To speed things up, borrowers that simultaneously filed bankruptcy due to their temporary financial hardships can also qualify after one year following their bankruptcy.