You lost your home in foreclosure and now you feel like your dreams of homeownership are forever lost. The good news is, you can become a homeowner again. The bad news is, you must wait. Just how long you must wait depends on the lender and the type of loan you want. The waiting periods range between 3 and 7 years. However, that is not the only factor. You must also prove you are worthy of a mortgage again.
The Common Mortgage Choices
Just as when you purchased your original home, the most common loan choices today still remain – FHA, VA, and conventional loans. Each of these programs has different requirements regarding a past foreclosure. The good news is each of them do offer the ability to secure financing again. Generally speaking, the following wait times prevail:
- FHA – 3 years from the date the home sold in foreclosure
- VA – 2 years from the date the home sold in foreclosure (an exception to the rule, however, is if you foreclosed on a VA loan, then you may not be eligible again)
- Conventional – 7 years from the date the home sold in foreclosure
As you can see, the waiting periods dramatically differ. If you want to hold out for a Fannie Mae or Freddie Mac loan, you must wait 7 years. An FHA loan, on the other hand, allows a shorter timeframe. The difference here, though, is Fannie Mae may grant you an exception if you can prove extenuating circumstances. The FHA does not grant exceptions any longer.
Proving Extenuating Circumstances
Extenuating circumstances are often up to personal discretion. For example, saying that you lost your home because you walked out on your job because you were fed up with your boss will not work. On the other hand, if you became ill and were unable to work for 6 months and you are the only money maker in the family may count. However, just saying you went through something terrible will not work. You must prove it. The more proof you have, the better your chances of approval. For example, if you did get sick, you can prove it with hospital bills and/or letters from your doctor. You may also need to provide proof of your loss of income and how it became difficult to pay the mortgage. Remember, any lender will look closely at your credit history. They can tell if you opened new accounts or made any other drastic financial changes during the time you lost your home.
Building Your Credit Back Up
No matter what type of loan you want after a foreclosure, you must build your credit back up. If you do want conventional financing, you will need a great credit score. This takes time. If you go after FHA or VA financing, the score does not have to be as high, but the history must be positive. There are a few ways you can help your credit score increase faster, but keep in mind, a foreclosure can knock the score down pretty good:
- Pay your remaining bills on time
- Don’t over extend your available credit
- Keep any accounts you still have open so the average age of your accounts gets longer
- Apply for new credit if you also filed for bankruptcy and have no debts left
The key is to make positive changes to your credit. You want to show a lender that you have recovered financially. This is especially important if you did not have a specific event that caused you to lose your home. If you were just financially irresponsible, you have big shoes to fill when you want to get a new mortgage.
Make a Large Down Payment
Aside from increasing your credit score, you should also save your money. The more money you can put down on the home, the better your chances of approval. Just how much you must put down varies by lender. FHA loans are known for their low down payment options of just 3.5% and VA loans do not require a down payment. Conventional loans, on the other hand, require between 3 and 20%, depending on the lender/program. However, no matter the minimum requirement for a specific loan program, the more you put down, the better your chances of approval. Putting a larger down payment shows lenders you are financially stable. It also gives you more of an investment in the property. With more of your own money at stake, you are more likely to make sure you make your payments on time and avoid foreclosure. This helps your chances of approval.
Keep Your Debt Ratio Down
Another key factor in obtaining approval is keeping your debt ratio down. Now that you have a history of losing a home in foreclosure, you must show you are financially responsible. If you apply for a loan with many debts on your shoulders, lenders are going to look at you as a high risk. How do they know if you will make your payments in the future or if you will default again? The best way to prevent this from affecting you is to keep your ratios as low as possible. You can do this in a few ways:
- Don’t open any new accounts, especially credit cards
- Pay your current debts down
- Only pay cash for things you buy, this way you only purchase what you can afford
Keeping your debt ratios even lower than the programs require is a great way to make lenders see you in a new light, despite your foreclosure.
Getting a mortgage after foreclosure is not impossible. It does take some work, though. The harder you work at it, the better your chances of approval. The key is to make sure your negative attributes are as small as possible. You already have a foreclosure in your history – the lender sees you in a negative light. The more positive things you can throw at him, the better your chances of approval. This does not mean you must have perfect credit or no debts. It just means you should show good faith effort in getting your finances back on track so you can purchase a house once again.