Can you qualify for a conventional mortgage if you had a foreclosure within the past seven years if the foreclosure is not on your credit report?
The answer to your question depends on when the foreclosure occurred, the circumstances that caused the foreclosure and your current credit score. Additionally, if you are willing to consider programs other than a conventional loan, you may be able to qualify for a mortgage sooner.
First, a foreclosure usually remains on your credit report for seven years. If a foreclosure or other derogatory credit event does not appear on your credit report that does not mean you are not required to disclose the event to your lender when you apply for a mortgage. Specifically, when you submit your loan application you are required to indicate if you have experienced a foreclosure in the past seven years.
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If you fail to disclose accurate information on your loan application, it is mortgage fraud, which is why lenders use both your credit report and application to understand your credit profile. If you do not include the foreclosure on your application and lenders learn about it through a different source or report, you will be declined for the mortgage. Additionally, lenders are less focused on where the credit event appears and more on the event itself.
As you noted in your question, the waiting period following a foreclosure before you can qualify for a conventional mortgage is typically seven years. Please note that if you experienced extenuating circumstances such as a job loss, serious medical illness or divorce that contributed to the foreclosure then the waiting period is only three years for a conventional mortgage.
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If you want to qualify for the shorter waiting period permitted under the extenuating circumstances guideline you are required to document the specific event that contributed to the foreclosure. For example, you must provide a job layoff notice, medical bills or records or a copy of your divorce agreement. Although qualifying for the extenuating circumstances provision requires extra documentation, this approach can reduce the required waiting period before you can apply for a mortgage by more than half.
In addition to applicable waiting periods, a foreclosure affects your ability to qualify for a mortgage because it impacts your credit score. A foreclosure can cause your score to decrease 100 to 160 points, depending on several factors.
The lower your credit score, the higher your mortgage rate and closing costs. A higher interest rate increases your monthly mortgage payment and potentially reduces the loan amount you qualify for. Additionally, if your score is too low, you may be ineligible for certain loans programs.
The table below outlines conventional mortgage rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to understand how your foreclosure impacts your loan terms as well as how long you are required to wait before you can apply for the mortgage.
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Please note that if you are willing to consider different mortgage programs, the waiting period before you apply for the mortgage may be significantly shorter. For example, the waiting period after a foreclosure before you can apply for an FHA mortgage is three years and only two years for a VA home loan. If extenuating circumstances apply, the waiting periods are only one year for an FHA mortgage and one-to-two years for a VA loan.
In short, the waiting periods before you can qualify for a mortgage for government-backed loan programs are much shorter than for a conventional loan. Additionally, the FHA and VA programs enable you to qualify for a loan with little (FHA) or no (VA) down payment and charge lower mortgage rates.
These programs also apply loan limits and you are required to pay extra mortgage insurance fees but they may enable you to qualify for a mortgage and buy a home sooner than you could with a conventional loan.
The table below compares FHA and conventional mortgage rates and closing costs. In many cases, FHA mortgage rates are lower than conventional rates but the closing fees are higher because you are required to pay an upfront mortgage insurance fee. We recommend that you compare FHA and conventional mortgage terms and qualification requirements to determine the loan program that is right for you.
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Your final financing option if you do not want to wait to apply for a conventional or government-backed mortgage is a private money loan. Most private money lenders, also known as hard money lenders, do not require waiting periods after negative credit events, although they charge much higher interest rates and fees.
If you decide to get a private money mortgage, we recommend that you refinance the loan with a traditional lender as soon as possible, keeping in mind any prepayment penalty you may be required to pay. In a best case scenario, your credit score also increases which allows you to qualify for better mortgage terms when you refinance.
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If you apply for a private money mortgage be sure to fully understand the significantly higher rate, costs and potential prepayment penalty, charged by the lender.
You can use the FREEandCLEAR Lender Directory to search for private money lenders. Although private money lenders are usually much more expensive than traditional mortgage lenders they may offer programs that better meet your financing needs and time frame following a foreclosure.
Sources
"B3-5.3-07, Significant Derogatory Credit Events: Foreclosure." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
"II.A.4.b.iii. Evaluating Credit History (TOTAL)." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.
"Chapter 4. Credit Underwriting." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.
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