Going through a foreclosure is a brutal, depressing experience. It damages your credit and your confidence. With patience and effort, you can recover, overcome the past, and own a home again. It will take time. It will take work and discipline. If you take the right steps, you will demonstrate you are ready to take on a mortgage loan.
Steps toward owning a home again:
- Be patient. It will take time for your credit and your financial health to recover after a foreclosure. Expect it to take three to seven years for your credit to improve, barring any additional financial setbacks. Seven years is also the average waiting period required for borrowers to regain eligibility.
- Practice healthy financial habits. Everything you do to improve your credit and financial status will get you that much closer to borrowing eligibility again. Maintain steady employment and pay down as much debt as possible. Avoid taking on new debt and refrain from making large purchases. Keep up with your bills and pay them on time.
- Save your money. Use this time to build up your savings, both for emergency expenses and for your future home. Start with saving three to six months’ worth of living expenses to provide a cushion to avoid further debt. Then start saving for your future down payment. You’ll need at least a 10% down payment.
- Monitor your credit. Request credit reports from several reporting bureaus. Make sure all of the information is correct. Look for errors that can hurt your rating, such as payments applied to the wrong account, duplicate account information, or a former spouse’s debt showing up on your report.
When you’re ready to purchase a home again, look at all the options.
Different types of mortgage loans have different requirements for people who went through a foreclosure. They also have different waiting periods from the time of the foreclosure. Here are the main types of loans and their waiting periods.
FHA Loans.
These loans require a three-year waiting period that begins when the foreclosure case has ended. Typically, that would be from the date your home was sold. If your foreclosed loan was through the FHA or the VA, you will be ineligible for another federally insured loan until you have repaid the government.
Conventional Loans from Fannie Mae or Freddie Mac.
These loans require a seven-year waiting period. The longer wait is because they are not backed by the federal government. However, the wait period can be shortened to just three years if you meet the following requirements:
- Prove in writing that the foreclosure was caused by extenuating circumstances
- Use the new mortgage for either a limited cash-out refinance or for the purchase of a primary residence (not for a second home or investment property)
- Demonstrate that the loan-to-value (LTV) ratio of the new loan is 90%
Conventional Loan from Private Lenders.
Because private lenders set their own terms, there is no set waiting period. They vary. But usually shorter waits require a larger down payment and higher interest rate.
Be Pre-Approved Before You House Hunt.
We recommend you secure pre-approval for a loan before you begin your search for your new home. The pre-approval process will demonstrate that you have come through the foreclosure setback and are now ready to be a homeowner again.
Contact our office with any questions, concerns or ideas. No Question is too small.
