Thousands of individuals are returning to the real estate market as home buyers after having lost a home to foreclosure in recent years. They are called 'boomerang buyers' and are one of the largest factors responsible for the recovery we are starting to see in home prices. In fact, we have started to receive so many questions on the topic of buying a home after foreclosure, I decided an article dedicated to the topic was in order.
How long do I have to wait after foreclosure to get a mortgage again?
Many are surprised to learn that in just two to three years it is possible to obtain a mortgage after going through foreclosure. VA Loans require a two year waiting period and FHA loans require a three year waiting period. Of course, VA loans are only available to those that meet military service requirements. Other than VA and FHA, you will have to wait at least four to five years in most cases (unless you have 20% or greater down payment).
Rebuilding your financial profile after foreclosure
Of course, there is more than just waiting two to five years to getting approved. Even for a VA loan, you will need to surpass a base credit score of at least 620 for most lenders. FHA and non-government loans will more than likely require a 640 or higher. While some let their finances completely go after foreclosure (as if abandoning a sinking ship), the more informed realize that keeping up their other obligations is the key to obtaining a mortgage in the future.
Another factor that weighs in heavily in the credit scoring calculation (other than timely monthly payments), is the percentage of your revolving credit lines that you are using (debt utilization ratio). Even if you pay your credit cards on time, it will really help your credit score if you don't use more than 50 percent of your credit line during the month. If you don't have any open credit accounts post foreclosure, you will need to establish at least three accounts to restore your credit score.
Establishing a credit score if you have no accounts in good standing
I would obtain two secured credit cards and also open up a secured loan with a local bank or credit union. In each case, you will be required to make a deposit of equal to the amount you are borrowing. This approach can quickly rebuild your credit score in less than a year (remember to keep your secured card balances low).
Proof of income and rental history are more significant than ever
Some may argue that the pendulum has swung too far back in the other direction, but gone are the days of lenders not fully verifying income and rental history. Pay your rent by check so that you can provide a verifiable paper trail that you have made timely rent payments since your foreclosure. If you are paying your rent to a management company be sure and get receipts each month as well.
If you are self employed, deposit all of your earnings into a business bank account and get with an accountant to be sure that you are maintaining adequate accounting records. The reality is that it will be much more difficult to get a mortgage if you are self employed, but it is possible if you have good financial records and have been in business for at least two years.
Down Payment Requirements
VA loans can be obtained with no money down, FHA loans for as little as 3.5% down, but most other mortgage loans will require a 5 to 10% down payment. In addition to the down payment, you may be required to prove that you have adequate money in reserve (savings) which may be equivalent to three to six months of the monthly payment. The bottom line; build up your savings as much as possible.
One final (and perhaps the most important) consideration before deciding to buy again
Many of those on the other side of foreclosure often forget about the fact that they may still have residual legal liability on their prior mortgage. Depending on the details of your foreclosure, you may technically still owe your former lender some amount of money. The difference between what your home sold for and your mortgage balance could represent a debt that may still come back to haunt you. Based on the laws of your state, and the details of your individual foreclosure, you could end up owing tens of thousands of dollars if your prior mortgage company decides to pursue for a deficiency judgment. A service that I recommend called Legal Shield provides attorneys by phone for a flat rate of about $25 per month. This might be a good service to use to assist on this issue. I would not recommend attempting to obtain a new mortgage until you make a final determination on this.