Losing your home is a stressful process to endure, but it doesn't mean you have to give up on your goal of owning a home forever. But many homeowners are unsure if they will be able to get a mortgage after foreclosure.
Yes, you can buy a home after going through foreclosure, but you may need to wait several years or more after your foreclosure is completed, and you may be charged a higher interest rate and need a larger down payment to do it.
Enough buyers have been in the situation of looking to buy a home after foreclosure that a term to describe them has come about: boomerang buyers.
Assuming you have the income to afford a home loan again, the first obstacle you will need to consider as a boomerang buyer is that lenders will require you to wait a period of time after your foreclosure before they will give you a loan. Each lender has their own requirements for the waiting period, as well as for your credit rating, and debt-to-income ratio.
Waiting period requirements from common lenders
VA Loans: The Department of Veterans Affairs require a borrower to wait two years after their foreclosure before receiving a VA-backed loan. To be eligible, you or your spouse must be a veteran or currently serving in the military.
FHA: The Federal Housing Authority requires a three-year wait to obtain a new FHA loan. However, if you can prove that an event beyond your control, like losing your job or suffering from an illness, caused your foreclosure, you may be able to get an FHA-backed loan one year after your foreclosure.
Fannie Mae and Freddie Mac: Loans backed by Fannie or Freddie require a seven-year waiting period.
Remember to consider
- The waiting period does not start when you move out or stop making payments. It starts when the foreclosure process is completed.
- You may be able to find a lender that does not require any waiting period, but the price of buying now could be a loan that has very high interest rates.
- A down payment will probably be required for any new mortgage loans, which may not have been the case at the time your last home was purchased. FHA-backed loans requires 3.5%, and others require 10% or more.
Focus on rebuilding your credit, and use time to your advantage
The period after foreclosure is a time to rebuild savings, pay down debt, and take actions that help to improve your credit. Whatever you do, don't make it worse by maxing out your credit cards or overextending yourself by taking on more loans or spending recklessly. Set a budget and stick to it.
Your credit rating is based on many things, not just one negative event, like a foreclosure. Foreclosure is bad for your credit, but it's worse when combined with other negative entries, such as missing payments for a credit card or car loan.
It's a good idea to check your credit report every year to see if you are moving in the right direction, or if there are other actions you need to take to move in the right direction. Paying your rent on time can be one of the actions that helps to rebuild your credit if your landlord participates in Experian's RentBureau program.
The easiest way to protect your credit and obtain a loan with the best interest rates is to avoid negative entries into your credit report in the first place. Obviously that's easier said than done, but everybody makes mistakes, and things happen that are out of the control of any one person. When you experience something that negatively impacts your credit, make every effort to put it in your past by fixing it and focusing on the things that you can control.
When it comes to purchasing a home after you've been through foreclosure, be aware that you will be viewed as a bigger risk than someone who hasn't. Understand the lender's point of view, and assure them that it won't happen again by showing a history of meeting all your financial obligations since losing your home.
If you are going through foreclosure now, retain a qualified, experienced attorney who can help you do everything possible to save your home, and if that's not possible, reach the best possible outcome with your lender.
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