Can I qualify for a mortgage with a foreclosure?
The answer to your question depends on when the foreclosure occurred and what factors caused the foreclosure. First off, it is helpful to explain what a foreclosure is and why it can affect your ability to get a mortgage.
If you violate the terms of your mortgage, such as if you do not make your loan payment, pay your property taxes or have the required homeowners insurance, your mortgage goes into default. There are many terms in your mortgage agreement that could potentially cause an issue but these are some of the more common events that cause a default. When your mortgage goes into default it is not good (and it hurts your credit) but you have the opportunity to cure the default, which means correct the issue that caused the default in the first place.
For example, if you fall behind on your loan payments, you can bring your mortgage current by paying any past due payments and late fees. Or if you have an overdue property tax bill, you pay your bill. If you forget to renew your homeowners insurance you re-up your policy so you have the level of coverage required by the lender. If you cure the default, the issue is resolved and you are back in good standing with the lender.
If you cannot cure the default, however, the lender could foreclose on the property that secures the mortgage. The foreclosure process is protracted, complicated and varies by state but it essentially means that the lender can take ownership of your property because you did not abide by your mortgage terms. A foreclosure can be devastating for property owners because they lose their homes plus there are long-term consequences for your credit and ability to qualify for a mortgage in the future.
When you compare the negative events that can occur when you have mortgage – including a short sale, default or bankruptcy – a foreclosure is the worst because it means that you did not fulfill your primary obligation as a borrower, which is to repay your loan. A foreclosure can result in a significant drop in your credit score of approximately 100 to 160 points and remains on your credit report for up to seven years.
Having a lower credit score usually means that you pay a higher interest rate on loans, including a mortgage, which costs you money. Additionally, even if you put in the time and effort to repair your credit and your score rebounds, you are required to wait a certain period of time following a foreclosure before you can qualify for a mortgage again.
The applicant waiting periods following a foreclosure before you can apply for a mortgage vary by loan program and other factors. Below we outline the waiting periods by program:
Waiting periods following a foreclosure with no extenuating circumstances
Conventional Mortgage: seven years
FHA Mortgage: three years
VA Program: two years
There may be lenders or specialized mortgage programs that require shorter waiting periods but the guidelines above apply to most borrowers who did not experience special circumstances that caused the foreclosure.
The waiting periods following a foreclosure for applicants that experienced an extenuating circumstance such as a job loss, significant pay decrease or serious medical issue are shorter, as we outline below:
Waiting periods following a foreclosure with extenuating circumstances
Conventional Mortgage: three years
FHA Mortgage: one year
VA Program: one-to-two years
In order to qualify for the extenuating circumstances designation you are required to document the specific event that led to the foreclosure. For example, if you lost your job you can provide your termination documents or unemployment paperwork. If you experienced a serious health issue, you can provide copies of medical bills and doctors reports.
Review Waiting Periods Following a Negative Credit Event Before You Can Apply for a Mortgage
Depending on your lender, loan program and personal situation, you may be required to wait between one and seven years before you can qualify for a mortgage after a foreclosure. It is also important to highlight that if you credit score remains low due to the foreclosure, you may not be eligible for certain mortgage programs or you may be required to pay a higher interest rate and mortgage payment, even if the waiting period has expired.
You can review mortgage terms based on your credit score and other criteria by contacting multiple lenders in the table below. Shopping multiple lenders is the best way to save money on your mortgage.
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If you do not want to wait to buy a home after a foreclosure, you should consider a private money mortgage, also known as a hard money loan, as they do not apply waiting periods. In this case, you obtain a mortgage through a hard money lender and then refinance that mortgage with a traditional lender and mortgage program as soon as the applicable waiting period expires. Hopefully your credit score improves during this time frame which enables you to qualify for better mortgage terms.
Review How a Private Money Mortgage Works
If you apply for a hard money mortgage be sure to fully understand the higher interest rate, fees and potential prepayment penalty, charged by the lender.
You can also use the FREEandCLEAR Lender Directory to search for private money lenders in your state. Private money lenders are more expensive than other lenders but may offer programs that enable you to buy a home sooner after a foreclosure.
Sources
"B3-5.3-07, Significant Derogatory Credit Events: Foreclosure." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.
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