How Long After Foreclosure Can I Purchase a Home?

September 16, 2009 No Comments »

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Timely mortgage Q&A: “How long after foreclosure can I purchase a home?”

If you’ve recently experienced foreclosure, you may be wondering when you’ll be able to purchase a new home.

While it may not be in your immediate sights, there’s probably a good chance you’ll want to get back on track and get into a new home once you do so.

Now when I say purchase a home, I mean doing so with the aid of a mortgage; obviously you can buy a house with cash at any time if you’ve got it on hand.

But if you’re looking to get another mortgage, you’ll be subject to various “foreclosure seasoning requirements,” which range from as little as one day to seven years, depending on the type of loan and the circumstances.

Foreclosures Remain on Your Credit Report for Seven Years

A foreclosure will remain on your credit report for seven years, which can be a total drag both on your credit score and your ability to obtain a subsequent mortgage.

However, some banks and bad credit lenders will allow borrowers to purchase a home within just a couple years of foreclosure, depending on your credit score and recent credit history.

It’s imperative to rebuild your credit as soon as possible after foreclosure to increase your chances of being approved for a mortgage post-foreclosure.

That means doing everything in your power to improve and maintain a healthy credit score, including paying all other bills on time and paying down high balances if you’ve got them.

The FHA Waiting Period Is Three Years

The FHA allows borrowers to purchase a home just three years after a foreclosure notice assuming you’ve kept credit clean since the negative action; for VA loans it’s a waiting period of two years.

Fannie Mae and Freddie Mac (conventional loans) require a seven-year waiting period (up from 5 years) for re-establishing credit following completion of the foreclosure action (as little as two years for a short sale).

[How long after short sale can I buy a house?]

The time period can be shortened to three years if you can prove extenuating circumstances tied to the foreclosure such as illness or job loss. If so, the new mortgage must be used to purchase a principal residence and will require a minimum 10 percent down payment.

Update: You can get an FHA just one year after foreclosure now if you experienced periods of financial difficulty due to extenuating circumstances.

Investors Must Wait Longer

And what if you own multiple properties?  Well, the foreclosure can affect your ability to refinance your other mortgages. First off, the credit impairment will lead to a higher interest rate if you try to refinance. Secondly, you’ll be limited to a no cash out refinance after three years (if you are even able to prove extenuating circumstances).

Cash out refinancing or purchase mortgages for second homes and investment properties require a full seven years after the foreclosure action. This has to do with the heightened risk tied to such transactions.

It’ll be interesting going forward to see how banks and mortgage lenders treat foreclosure in terms of subsequent mortgage loan approvals.

You’d have to suspect that they’ll ease guidelines somewhat to accommodate the millions of new Americans that have experienced foreclosure in recent years.

At the same time, guidelines may remain elevated as a result of the mortgage crisis, so only time will tell how it all pans out.

Be sure to speak with your loan officer or mortgage broker to get the latest on the rules, as they can and do change often, and vary widely amongst lenders.

There’s always someone willing to take on more risk, so don’t be surprised if a lender has no waiting period if certain stringent requirements are met.

Foreclosure Waiting Periods In Summary

Waiting Period for an FHA Loan After Foreclosure:

- 3 years under normal circumstances
– 1 year if extenuating circumstances

Waiting Period for a VA Loan After Foreclosure:

- 2 years under normal circumstances

Waiting Period for a Conventional Loan After Foreclosure:

- 7 years under normal circumstances
– 3 years if extenuating circumstances (max LTV 90%, primary residence purchase only)
– 3 years for rate and term refinances on other properties if extenuating circumstances
– 7 years for cash-out refinances and purchases of investment properties or second homes

Waiting Period for a Portfolio Loan After Foreclosure:

- 1 day if a lender is willing to offer you a loan, though underwriting requirements vary considerably and will likely be very robust (and the interest rate will probably be higher than normal)

Tip: Even if you can get a mortgage relatively soon after foreclosure, the terms likely won’t be as favorable as a result.  For example, you’ll probably pay a higher mortgage rate, so keep that in mind. It might make sense to wait until your credit score improves.

(photo: aarongeller)

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