What You Need to Know About Buying a Home After Foreclosure
What You Need to Know About Buying a Home After Foreclosure
Foreclosure may seem like a life sentence, ending the road to home ownership for good, but there is light at the end of the tunnel. It may take time, but with a little hard work and know-how, people who have gone through foreclosure can successfully buy a home in a shorter amount of time than they may think.
Use this guide to learn more about buying a home after foreclosure and where you can find more information:
- Can I buy a home after a foreclosure?
- Which loan types are best for someone who has gone through a previous foreclosure?
- How long will I have to wait before I can buy a new home?
- Will I be able to qualify for a mortgage?
- Will I need a large down payment?
- How can a real estate agent help with purchasing a home after foreclosure?
- Real Estate by Design Idaho can help with your home purchase today
Can I buy a home after a foreclosure?
Immediately after a foreclosure, you will not be eligible for a new loan in most cases. This is to be expected. Mortgage companies care about risk, and the biggest risk for them is foreclosure. Someone with a prior foreclosure is usually considered too risky for a new home loan for a few years, generally at least five and up to seven years, afterward.
Just like your credit score, your risk factors can improve as time goes on, as long as you can demonstrate financial soundness. Right after a foreclosure, it is unlikely that you are financially stable anyway, so this time period should be utilized to rebuild your credit. It gives you time to get back on track. Credit is built through FICO scores, but your financial history will also be evaluated specifically by mortgage companies. When they see a foreclosure, it is a red flag. Therefore, your activity following foreclosure matters.
Mortgage companies know that life happens, or else they would not have any clients. Accepting you for a loan is not about the fact that you ever had a foreclosure. It is simply about risk. Do your recent past and current asset and debt activities appear to be stable? Are you meeting financial obligations? Do you have a steady income? Lastly, how much time has passed since any negative financial events? It may seem intrusive, but mortgage companies are going to dig deep before agreeing to a new home loan when they see a history of foreclosure.
One of the greatest tools you have available once you are eligible for a loan is the ability to explain. If you had a very unique, one-of-a-kind hardship, it will be easy to explain. Extenuating circumstances causing foreclosure may make lenders shorten wait times before obtaining a new loan. However, even the least severe of hardships can be explained by showing different life choices that prove to a bank that you will not be a high risk borrower any longer. If you made a few poor financial choices in the past, your good decisions following a foreclosure can speak volumes to your reliability. People learn from their mistakes, and the mortgage company simply wants to see that you have learned from the past and are prepared to begin anew.
Immediately following a foreclosure, it is likely that the borrower will continue to experience financial difficulty for at least a while. It is advisable to seek financial counseling from a banking or financial services organization. Mortgage counselors are also available free-of-charge through the United States Department of Housing and Urban Development (HUD). They can help guide you through your mortgage options following foreclosure and provide contacts to aid in pursuing a new loan.
Which loan types are best for someone who has gone through a previous foreclosure?
Calling any one type of loan the best choice for all people who have gone through a previous foreclosure would be a mistake. Every situation is different, and the opportunities for future borrowers who have gone through foreclosure vary greatly. It is all about meeting the loan’s requirements, and those differ for each type.
Although Fannie Mae requires a waiting period following foreclosure or any other major negative credit events, these times vary depending on the situation. For example, if you had a first-time foreclosure due to extenuating circumstances, this may be a good option. The lender may require 5 percent down or more in order to take on the risk. Fannie Mae may only make you wait three years following foreclosure if you have successfully rebuilt your credit and foreclosed only due to extenuating circumstances.
Freddie Mac is very similar to Fannie Mae in waiting times, but they may lower the waiting time even more than Fannie Mae if the foreclosure was due to extenuating circumstances. Both Fannie Mae and Freddie Mac exist in order to making housing affordable in America. They may not be the best options following foreclosure, but they are good options for some, which is in line with their purpose.
Federal Housing Administration (FHA) loans are often the best option for people seeking a loan following a foreclosure because they are geared toward lending to people who would not otherwise qualify for loans. FHA loans to do not require high credit scores like some other mortgage lenders, and they may require lesser waiting periods. In very rare cases, a person may only have to wait 2 years after foreclosure to acquire an FHA loan.
Veterans Administration Loans
Many veterans who foreclose on their home think they have lost the ability to use their VA loan benefits. This is not true! Just like other loan companies, there is a waiting period. If you can get your credit to an acceptable level, you can apply after the waiting period has passed. Veterans Administration loans are often attractive choices to future homeowners who qualify because they offer low interest rates that are still available after a prior foreclosure.
Non-qualified loans are backed by hedge funds and private equity instead of government agencies, so they are generally more relaxed in their requirements and waiting periods. This type of a loan is good for people who have the ability to pay off a loan quickly and can’t qualify for other types of loans. They also may be good for people with sporadic income. This is because they typically require very large down payments (20%) and have high interest rates.
It is difficult to say which loan will be the best for a person after foreclosure, but it can be said that FHA loans are typically the best because of lower interest rates and smaller down payments. What is important to remember is that each type of loan does offer lending even after a foreclosure, and lenders base their acceptance on the circumstances surrounding the foreclosure, credit scores, current income, and time passed since the foreclosure. A person seeking a mortgage following foreclosure will find the best rates and down payment requirements by proving that they can repay the loan through responsible credit history and stable income.
How long will I have to wait before I can buy a new home?
Most loan companies will shorten the waiting period for extenuating circumstances if it is a first-time foreclosure, and the borrower(s) previously had good credit. However, there are general wait times that can be expected from certain types of loans:
Typical Wait Times for Types of Loans after Foreclosure
- FHA: 3 years
- Fannie Mae: 7 years
- Freddie Mac: 7 years
- Veterans: 2 years
- Private lender: 2 to 8 years
The wait time listed above are general rules, and each lending company will adjust on a case-by-case basis. For example, there have been cases of FHA loans given following foreclosure in as little as one year. It is all dependent on your financial circumstance, but mortgages are possible in some cases (non-qualified) right after foreclosure.
If a potential borrower can show that the circumstance leading to foreclosure was a specific event such as a death in the family or divorce, lending institutions may feel comfortable shortening wait times if credit history is otherwise acceptable. Everyone suffers hardship, and the financial repercussions of hardship may be forgiven if it was caused by an extenuating circumstance.
Will I be able to qualify for a mortgage?
The nerve-racking component of getting a new mortgage following foreclosure is figuring out whether or not you qualify. It can be discouraging to be turned down for a loan, and understanding what the requirements are for each mortgage option is difficult. Three major qualifications for a mortgage are credit score, income, and debt-to-income ratios.
For FHA loans, you may be able to qualify for a loan with a credit score as low as 500. A score of 620 or higher is a typical requirement for Veterans Administration, Freddie Mac and Fannie Mae loans. In many cases, the borrower’s credit score can be lower if a larger down payment or higher interest rate is negotiated. In most cases, it is better to improve your credit score prior to seeking a loan. This can take a significant amount of time, so it is good to know there are options while your credit is being repaired.
Qualifying for a mortgage also means proving that you can afford it. Current pay stubs and tax documentation may be required, and the loan company will want to see proof that you consistently make enough money to cover the monthly payments along with your other monthly bills.
The high range of debt-to-income allowances for mortgage qualification is 43 percent, but it should generally be below 38 percent. This means that for each dollar you make in income each month, you should have no more than 43 to 38 cents in debt. Again, the mortgage company understands that many paychecks are spent on monthly bills and debt repayments (credit cards). They want to see that you can reasonably take on more debt.
Will I need a large down payment?
One of the reasons mortgage companies agree to fund a loan following foreclosure is that they can charge more interest and require a large down payment. This is not true for every lender, but some require down payments of over 25 percent! Thankfully, there are also some options with small down payment requirements. A typical FHA loan will require 3.5 percent; however, a borrower with a low credit score following foreclosure, it may be increased to 10 percent.
Everything credit- and income-related is considered when applying for a home loan following foreclosure. There is not a lot of difference between applying for a loan pre-foreclosure and post-foreclosure except that there is a negative credit event that changes the timeline and loan requirements a bit. One of those requirements is a larger down payment, which minimizes the risk to the mortgage company. It simultaneously proves an ability to save the kind of money that creates financial stability and decreases risk.
How can a real estate agent help with purchasing a home after foreclosure?
Real estate agents are not financial advisors, but they have a shared goal of maintaining the financial success of their clients. They also work very closely with financial advisors, mortgage brokers, and lending companies. They become experts in the field of home lending through their work experiences with lenders. Therefore, they can offer significant help when purchasing a home after foreclosure.
The biggest help real estate agents offer is streamlining the process. Just like first-time home buyers, people buying a home following foreclosure often don’t know where to begin. Especially when there are so many options available, a real estate agent can refer a potential homebuyer to a mortgage broker who they know has successfully connected post-foreclosure clients with good home loans in the past.
It’s all about networking, and it is in the best interest of the real estate agent to connect you with a lender who will get their client an attractive loan. This ensures that they have your best interests prioritized. They may even know credit specialists who can help you build your credit while they work to show you your next home. Having a real estate agent is having a personal advocate for your future home ownership, and they have already done a lot of the leg work necessary to find a good loan following foreclosure. There experiences with people in similar circumstances will be very valuable.
Real Estate by Design Idaho can help with your home purchase today.
Real Estate by Design is an agency that has experience helping homeowners with defaulted loans through actions such as short sales and foreclosures, so they understand what people go through when they foreclose on their home. This makes them uniquely equipped to smooth the transition from home loss to home ownership.
It can be difficult to know what the first steps are when you are ready to buy a home again, and Real Estate by Design has the resources needed to get you back on the path to home ownership. Contact William Lowery at Real Estate by Design to get in touch with one of the most experienced agents in the Treasure Valley. He has the experience and the regional knowledge to help you successfully buy a home after foreclosure.