A foreclosure doesn't mean you're banned from buying another home. There are ways to get credit-worthy once you've overcome a foreclosure. No matter what your credit history looks like, you can get a home loan approval even after a foreclosure.
Written by Todd Carney, J.D. Harvard Law 2021.
Updated November 28, 2021
Going through a foreclosure is tough. After dealing with the stress of missing mortgage payments and ultimately being stripped of homeownership, it can be hard to recover. Despite this, you might want to make another home purchase in the future, particularly if mortgage rates are low. Yet it might seem impossible to get any type of loan after you have gone through foreclosure.
The good news is that you can purchase a new home even if a bank has foreclosed on you. But you’ll face some restrictions. This piece provides guidance for how to buy a home after foreclosure and deal with any obstacles you may face.
Foreclosure Can Make Buying Another Home Difficult
Foreclosures will usually remain on your credit report for seven years. If you have a foreclosure that’s older than that, it shouldn’t be on your report. But a recent foreclosure, particularly one that occurred only a year or two ago, will complicate the homebuying process.
Foreclosures and alternatives like a deed-in-lieu of foreclosure or a short sale will all negatively impact your credit score, but you will still be able to purchase real estate. Still, you will face some obstacles. You will probably need to wait a certain amount of time before a mortgage loan servicer will even consider giving you a mortgage. The length of time you’ll have to wait will depend on the loan servicer and the kind of loan that you’re seeking.
Borrowers in this scenario are sometimes called boomerang buyers or borrowers. When dealing with boomerang buyers, mortgage companies want to be sure that the borrower has handled the situation that caused the foreclosure and won’t repeat past mistakes. For example, if a medical emergency caused financial hardship that led to a foreclosure, the bank will want to see that you’ve addressed this and that you have a plan to address any similar issues in the future.
Lenders also like to see that you had a solid credit score before the foreclosure and that a one-time emergency is what led to the foreclosure. They’ll also want to see that you’ve built up a strong FICO score since the foreclosure. You can do this by consistently paying off your debt. All of this will help lenders see that you’re currently in a strong financial situation and that you won’t be facing another scenario like the one that caused you to lose your home.
Extenuating Circumstances Can Shorten Waiting Periods
If you’ve faced certain extenuating situations, you may be eligible to apply for a mortgage after a short waiting period. A circumstance may be considered extenuating if it:
Was a rare event that can’t occur again,
Was out of your control, and
Led to a significant decline in your income.
Some examples might be that the primary breadwinner died or someone in your family faced a major medical emergency. To qualify, you’ll need to explain your situation and show that it caused the foreclosure. Many things can severely impact your finances, but most won’t qualify as extenuating circumstances. For example, going through a divorce or not being able to sell your real estate may seriously impact your finances, but mortgage loan servicers don’t consider these beyond your control.
Ultimately any potential scenario will go before an agent who specializes in loan underwriting. The agent will evaluate the situation and decide whether it meets the criteria for a shorter waiting period.
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Different Loans Have Different Foreclosure Waiting Periods
Below are the waiting periods and restrictions for different home loan programs. After you go through the mandatory waiting period, you’ll need to follow the program’s other lending policies. Individual home loan servicers can also put further rules or even longer waiting times in place if they choose.
Conventional loans are ones that are backed by Fannie Mae or Freddie Mac. They mandate:
A seven-year waiting period following a foreclosure until you can apply for another mortgage, or a waiting period as short as three years if you can prove extenuating circumstances. In this scenario, a 10% down payment is required.
If you provide a down payment that is under 20%, then you have to buy private mortgage insurance (PMI). It is best to check with the lender about how the PMI provider factors in foreclosures. For example, the PMI could mandate more rigid requirements than Fannie Mae or Freddie Mac. These tough restrictions could prove more difficult than having a higher down payment.
When you have gone through a short sale or deed in lieu of foreclosure Fannie Mae usually requires a four-year waiting period but will allow as little as two years if there are extenuating situations. Freddie Mac typically mandates a two-year waiting period with or without extenuating factors.
Federal House Administration (FHA) loans have the following requirements:
After the foreclosure, the homeowner has to wait for three years to apply for another mortgage loan.
FHA loans do allow you to make a case to shorten the time you need to wait if you can prove you faced extenuating conditions, but they don’t specify how much they might shorten the time period. If they agree to shorten the waiting period, you still have to show that you’ve had good credit since the foreclosure to apply for an FHA loan. As a result, it will typically take a year before you’re eligible for a new loan under the extenuating circumstances provision.
If you had a short sale or deed in lieu of foreclosure instead of a foreclosure, you’ll also face a three-year waiting period before you can apply for another loan or a one-year period if you show extenuating issues.
Borrowers dealing with Veterans Affairs (VA) loans, face the following restrictions:
You have to wait two years after a foreclosure to apply for another VA loan and show that you’ve re-established credit. Or if you can prove that you faced extenuating circumstances and no longer have bad credit, then you only have to wait one year.
If you had a VA loan that was foreclosed on, then you may not be allowed to take out another VA loan. That’s because the VA requires you to repay the original loan to be eligible for future loans.
If you did a deed in lieu of foreclosure, you’ll usually be required to wait two years or one year if there are extenuating conditions. Interestingly, the VA doesn’t specify how long you’ll have to wait following a short sale.
For those looking to apply for a U.S. Department of Agriculture (USDA) loan, these provisions are in place:
You’ll need to wait for three years after a foreclosure unless you can show extenuating circumstances, known here as a temporary situation. In this situation, you will technically only have to wait one year, but the issues surrounding the temporary situation must have been resolved at least a year before you can get a loan.
There is also an interesting provision that allows you to reduce the time you need to wait if you can show that the new loan will substantially cut your housing expenses. The USDA defines substantial as 50% or more.
If you did a short sale or deed in lieu of foreclosure, you still need to wait three years, regardless of if there were extenuating circumstances were involved.
Finally, if you choose to go through an alternative lender, each will have its own waiting period. Alternative lenders include private loan servicers, lenders that give hard money, and subprime mortgage companies. These lenders typically have a wide range of waiting periods, and some lenders won’t make you wait at all. Not needing to wait for a loan may seem miraculous, but it’s important to note that these loans are often expensive due to higher interest rates, fees, and points, among other issues.
Despite these drawbacks, these loans can prove beneficial in helping you rebuild your credit report and FICO score. This can help you refinance later on and get a lower-cost conventional mortgage.
Can CAIVRS Prevent You From Getting a New Mortgage?
There is an important federal database known as the Credit Alert Verification Reporting System (CAIVRS). The CAIVRS keeps track of individuals who default on any federal loan, be it a student loan or a government-backed home loan. The FHA, VA, or USDA will review the CAIVRS list when you apply for a mortgage with them. If the lender finds that you’re on the list, then it won’t loan to you. To remove yourself from the CAIVRS list for matters concerning student loans, you need to completely resolve the loan. If you have faced foreclosure on a government-backed loan, you have to wait three years to be removed from the list.
There are six government departments that submit information to CAIVRS: the Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), the Department of Education (DOE), the Department of Agriculture (USDA), the Small Business Administration (SBA) and the Department of Justice (DOJ).
If you have recently gone through foreclosure, it may be more difficult for you to get another home mortgage. Lenders typically require you to wait a particular amount of time before you can apply for another mortgage. The time you have to wait will depend on which loan provider you are dealing with and what kind of loan you seek. If you faced an extenuating circumstance that led to the foreclosure, you can significantly cut this waiting period.
Private lenders or subprime mortgage lenders will often have a shorter or no waiting period, but these loans typically cost more. Still, you may be able to get one of these loans, use it to help rebuild your credit, and refinance later.