After a bank takes possession of your home because you defaulted on the payments, you have specific waiting periods before you can apply for a mortgage again. Fannie Mae and Freddie Mac have different guidelines than FHA or any other government-backed loans; however, they both require a specific amount of time you must wait in order to ensure you are back on financial track. One question many people have is if having a cosigner makes the situation better for them. Could they purchase a house earlier if they have someone accountable signing the mortgage too?
Unfortunately, the answer is “no.” You cannot secure a loan any sooner if you have someone sign the mortgage with you. Because you have the foreclosure in your credit history, you must pay the consequences and wait until the appropriate amount of time elapses before you can apply again. This goes for every program and the credit history or worthiness of the person willing to cosign has no bearing on how long you must wait.
The Consequences of a Foreclosure
First, you have to understand the consequences of a foreclosure. Because the bank took possession of your home, it shows any future lenders that you got in over your head. Either you could not afford the payments right from the start, which occurred as a result of the many stated income loans banks offered in the past, or your financial circumstances changed somewhere down the road and you suffered the consequences. Future lenders are going to hesitate to offer you a new loan program until you can show beyond a reasonable doubt that you rectified the situation – it just makes sense.
What is a Cosigner?
A cosigner is someone who helps your application look “better.” They are great when someone has borderline credit or a higher debt ratio because they can help balance out the risk level you bring the lender. This person does not have any interest in the property – they strictly provide their credentials to help you secure a loan. In exchange for the loan, however, the person cosigning with you becomes legally liable for the payments should you default.
How a Cosigner Affects the Foreclosure Waiting Period
One way a cosigner cannot help you is with the foreclosure waiting period. This person is not there to erase your bad credit – he is there to help your situation look better. The lender cannot overlook the fact that you defaulted on a home before; they must wait until you go through the proper waiting period before applying for a mortgage again. Right now, the waiting period for a conventional loan is just 2 years after a foreclosure and 3 years for an FHA loan. You can have someone cosign for the loan with you after you wait out this time period, but not before as it will not have any impact.
The Compensating Factors
A good way to look at someone who will cosign a loan for you is a compensating factor. Lenders use this person’s good credit and minimal debt to help better your situation. They consider this person a “fall back” person or someone they can rely on to make the payments should you become unable to do so. This does not mean you can have disastrous credit or an insanely high debt ratio, though. You still have to do your part since you are the one making the mortgage payments and living in the home.
Other compensating factors you can provide a lender to help improve your situation include:
- A savings account with several months’ worth of reserves in it to help you make your mortgage payment should your normal income stop
- A low debt-to-income ratio, which means you have little debt; the less you have the better you look to the lender
- A stable employment history; the less you changed jobs in the last few years, the more stable you look to a lender
The bottom line is that a cosigner can help you, but not before the designated waiting period. If you have a foreclosure in your history, you have to do your due diligence and wait until the time is up. Think of it as a time to recover from a financial disaster. Chances are you should not be starting a new loan right away anyways, even if someone could cosign for you before the waiting period was over. You need time to recover financially and emotionally. Use this time to save money in an emergency fund or for a down payment. Don’t forget you will also need money for closing costs and to set up an escrow account. Each of these things adds up over time and if you lost your home recently, you probably do not have a lot of cash lying around anyways.
As you try to recover from the defaulted mortgage, do not think about who can cosign for you in the future, but rather how you can perfect your financial status so you don’t need a cosigner. Since you have between 2 and 3 years to prepare yourself, there is plenty of time to put your foot down and become financially responsible. If the time comes that you can apply for a mortgage and you need a compensating factor, have someone sign for you, but not before you try to do it on your own.
