The days of a foreclosure preventing you from becoming a homeowner for at least 7 years is behind us. Today, many programs make it possible to own a home in as little as 2-3 years after losing a home. Of course, this does not pertain to every person affect by a foreclosure. There are certain steps you have to take after foreclosure in order to make yourself more attractive to lenders.
The Normal Waiting Period
If you asked any conventional lender about the normal waiting period to secure a mortgage after foreclosure, they would tell you 7 years. This used to be the norm. The good news is there are many exceptions to this rule and most people do not have to wait 7 years – VA loans require a 2-year waiting period and FHA loans require 3 years. If you can prove extenuating circumstances caused your foreclosure, you could reduce your waiting period significantly. In order to qualify, you have to be able to prove that something outside of your control affected your financial situation. A few examples include:
- Job loss outside of your control (you got laid off, not fired)
- Medical issues that prevented you from being able to work
- Injury that prevented you from being able to work
- Death in the family that affected your financial status
These are the most common reasons lenders can grant an exception and consider your circumstances extraordinary.
Proving Extenuating Circumstances
Before you can assume you will qualify with extenuating circumstances and waive the standard foreclosure waiting period, you have to be able to prove the following:
- The circumstances occurred outside of your control
- Your financial downfall was directly related to the circumstance
- Your income decreased at least 20% as a result of the circumstance
- Your income has since increased
- You started repairing your credit after the occurrence
Some loan programs offer these extenuating circumstances programs, however, the FHA program, called the “Back to Work” program recently ended on September 30, 2016. If you need to secure FHA financing, you will have to wait 3 years after your foreclosure in order to apply.
Getting Ready to Purchase a Home After Foreclosure
It is not enough to say that you waited the expected waiting period after your foreclosure; you need to prepare yourself financially. This occurs in several steps:
- Prepare your credit – This is the most important step as you likely have some repairing to do. In order to make your credit better, you need to pay all of your bills on time and possibly apply for new credit. The more credit you have which you pay in a timely manner and which you do not overextend, the better credit risk you become. The lender will look not only at your credit score, but at the history too in order to ensure your risk level is low.
- Save money – You might have to put down a larger down payment on a new home after foreclosure. It really depends on the program you choose, but the more money you have on hand, the lower your risk level. For example, if you have 10% to put down on a home, you lower your LTV, which lowers your risk. Even if you have a high enough credit score to avoid needing a large down payment, the reserves you have on hand can help your ability to get approved.
Explore the Possibilities
Even though the FHA “Back to Work” Program expired, does not mean you do not have other options. The VA only requires a 2-year waiting period. If you or your spouse are a veteran and you have a Certificate of Eligibility, this affordable program can give you a great financing option. There are also many portfolio lenders that offer a variety of programs for borrowers that experienced a foreclosure.
You have to shop around to see what each lender has to offer. If you truly have extenuating circumstances, you may even be able to secure conventional financing. Of course, the requirements are tighter for this program, so you will have to work a little harder to meet them, but they can be worth it. Again, the more money you have to put down or use as reserves, the better off you will be.
The good news is that you probably will not have to wait 7 years before you can become a homeowner again. The bad news is you will have to work hard to secure financing. It will not happen overnight, but if you carefully build your financial status back up by saving money, reducing your bills, and paying your bills on time, you will have a shorter wait time after foreclosure.
You should know that some programs require you to undergo housing counseling in order to understand what you are getting yourself into again. Not every program requires this, but it can be a good refresher course to help you stay on track financially and to prepare for the unknown in the event that something happens to you again down the road.
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