Many people who have gone through foreclosure wonder if they will ever able to buy a house again. While your credit will take a big hit after foreclosure, you may be able to get another mortgage after some time passes. The amount of time you must wait before applying for a new mortgage loan depends on the type of lender and your financial circumstances. Read on to learn more.
(For more articles on rebuilding credit after foreclosure, visit our Improving Credit After Foreclosure and Bankruptcy topic area.)
Qualifying for an FHA Loan After Foreclosure
FHA loans are the most forgiving of foreclosures. To qualify for an FHA mortgage loan, you must wait at least three years after the foreclosure. The three-year clock starts ticking from the time that the foreclosure case has ended, usually from the date that your prior home was sold in the foreclosure proceeding. If the foreclosure also involved an FHA loan, the three-year waiting period starts from the date that FHA paid the prior lender on its claim.
Exceptions to the Three-Year Waiting Period
You may be able to qualify sooner than three years if you can show extenuating circumstances. That means demonstrating to the lender that the foreclosure was caused by a one-time event that was beyond your control, such as a:
- serious illness or death in the family
- divorce, or
- job loss.
Qualifying for a Fannie Mae/Freddie Mac Loan After Foreclosure
Prior to June 20, 2010, the waiting period for a Fannie Mae loan following a foreclosure was five years. Now, to qualify for a Fannie Mae or Freddie Mac loan, you must wait at least seven years after the foreclosure.
Exceptions to the Seven-Year Waiting Period
You may be able to shorten the waiting period to three years for a Fannie or Freddie loan if you can meet all of the below requirements.
- Prove in writing that the foreclosure was the result of extenuating circumstances.
- Show that the maximum loan-to-value (LTV) ratio of the new mortgage is either 90% or the LTV ratio listed in Fannie Mae's eligibility matrix (see, www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf), whichever is greater.
- Use the new mortgage loan for either the purchase of your personal residence, or a limited cash-out refinance (you cannot use the loan to purchase a second home or investment property).
Also, the seven-year waiting period only applies to conventional loans that are sold to Fannie Mae or Freddie Mac. This rule does not apply to Fannie or Freddie loans that are FHA-insured.
Conventional, Private Lenders
For most other types of lenders, the waiting periods can vary. Most are not as lenient as FHA and Fannie and Freddie lenders. The waiting period can range from two to eight years, or longer. Other lenders may shorten the post-foreclosure waiting period, provided that you make a larger down payment (sometimes 25% or more) and agree to a higher interest rate.
Your FICO Score and Getting a New Mortgage Loan
Notwithstanding the waiting periods, you must still establish good credit following the foreclosure. That means your FICO score must meet the lender's minimal requirements to qualify for a post-foreclosure mortgage loan. Alternatively, while you may be able to obtain a new mortgage with a low FICO score, you may have to make a larger down payment or pay a higher interest rate.
For instance, a foreclosure may cause your FICO score to drop to 550 or less. Even after the three-year foreclosure period, you may not qualify for FHA's low-down payment loan. That is because the minimum FICO score required for a low down payment FHA loan is 580. You may still qualify for an FHA loan with a 550 FICO , but instead of making a 3.5% down payment, your down payment would be higher, at least 10%.
FICO scores can be significantly damaged by a foreclosure. And the higher your credit score, the bigger the FICO drop with a foreclosure. For more information, see Which Is Worse for Your Credit Score: Bankruptcy, Foreclosure, Short-Sale or Loan Modification.
To re-establish good credit and boost your FICO score, you should:
- pay your bills on time, consistently
- keep your credit account balances low
- monitor your credit report for errors and inaccuracies, and
- maintain a small number of credit accounts.
For more information on how to do this, see the articles in our Credit Repair topic area.