Buying again after a foreclosure, short sale, or or deed-in-lieu of foreclosure can be done, with some hard work – and waiting.
Q: We lost our home to foreclosure two years ago. Are there any mortgage programs that can get us back into home ownership?
A: Thanks for the question Jason. Lenders don’t like to see a foreclosure on your credit report. That being said, there may be some hope if you’ve demonstrated a rehabilitated life situation and have had perfect credit since the foreclosure.
The lender is looking for proof that the circumstances that caused the foreclosure are well behind you, and are not likely to be repeated. For instance, if you had a medical emergency, incurred high hospital bills and missed work, but you are now recovered, there’s a good chance you could be approved.
But for an extreme example, if you had gambling problems and you’re still visiting the casino on a regular basis, you won’t be approved.
So in summary, here’s what the underwriter is looking for:
- You had great credit before the foreclosure
- You have had great credit since the foreclosure
- The foreclosure was caused by a one-time event
- You are now recovered or have made fundamental changes in your life since the event that caused the foreclosure.
A few loan types allow shorter waiting periods for “extenuating circumstances.” But what exactly is an extenuating circumstance? In simple terms, it’s a situation that was beyond your control. A medical emergency, as described in the above section, is a good example.
An extenuating circumstance would not be a divorce, a drop in equity, or inability to sell your home. While those are tough situations, they’re not considered “beyond your control.”
The loan underwriter will look at your situation and make a judgment call. He or she wants to build a case that your foreclosure was due to an event that had absolutely nothing to do with your lifestyle or choices, and despite your best efforts, you lost the home.
See if your situation will be considered an extenuating circumstance by speaking with a loan expert here.
Conventional Loan Foreclosure Waiting Periods
With a conventional conforming loan, there’s a 7-year waiting period after foreclosure. The exception is for a documented extenuating circumstance that was out of your control that caused the foreclosure, are you’ve now remedied the problem. In that case there’s a minimum 3 year waiting period, and you have to put 10% down.
Keep in mind that if you are putting less than 20% down, check with your lender up front how the private mortgage insurance (PMI) company will view the foreclosure. In many cases, PMI companies will impose stricter standards than Fannie Mae or Freddie Mac do.
FHA Loan Foreclosure Waiting Periods
If you’re not sure which loan type would be best after a foreclosure, FHA is a great place to start. This loan type is probably the most forgiving when it comes to past credit history.
As of August 15, 2013, FHA has reduced their foreclosure waiting period to one year in some cases. Borrowers who can document a 20% loss of income for at least 6 months may be eligible to buy again one year after the foreclosure was final. The borrower must show a re-established credit profile over the previous 12 months and they must complete housing counseling.
FHA has recognized that many people were laid off or had reduced incomes during the financial crisis of 2009 and following. FHA has relaxed their guideline in this case, since a foreclosure due to reduced income may not be reflective of the person’s true creditworthiness. The one-year exception is good for FHA case numbers assigned on or after August 15, 2013 through September 30, 2016.
See our FHA “Back to Work” page for details about the program and a quick-check chart to see if you might qualify.
For other situations besides a prolonged income loss, there’s a 3-year waiting period from when the foreclosure was final, and there must be an extenuating circumstance.
The FHA lending manual says the circumstance must have been “beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure,” and also that, “The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.”
Divorce is not an extenuating circumstance unless the property was awarded to the spouse and he or she defaulted after you no longer owned it.
If in doubt about your situation, talk to a loan expert to see if you could be approved for an FHA loan.
VA Home Loans after Foreclosure
A VA loan may be approved two years after a foreclosure provided proof of re-established credit. But, if your foreclosed mortgage was a VA loan, you might have no more VA entitlement left. Entitlement is not restored if you VA loan was not repaid in full.
Qualifying for a USDA Home Loan after Foreclosure
With the popular USDA zero down loan, it’s pretty simple. You can’t qualify within 36 months of your foreclosure. There are no exceptions because your foreclosure was due to circumstances beyond your control.
CAIVRS on Government Loans
If you have defaulted on an FHA, VA, or USDA loan, you will not be eligible for another government-backed loan for 3 years after your past lender reported the foreclosure to the Department of Housing and Urban Development (HUD).
The lender will pull a report that’s called “CAIVRS” (pronounced CAY-vers and stands for Credit Alert Interactive Voice Resonse System). You’ll need to wait 3 years from the foreclosure date if the CAIVRS system indicates a foreclosure on a government sponsored loan.
Boomerang Buyer Foreclosure Waiting Periods
Keep in mind that though the above waiting periods and restrictions are what the particular loan guides say, each lender can make additional rules and require longer waiting periods. It is possible to buy again after foreclosure, but it might just take some waiting.
If you’re unsure whether you could be approved for another home loan, speak to a mortgage expert here to get your questions answered.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a mortgage writer with over 11 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.