Those with a history of foreclosure may worry if they’ll ever be able to qualify for a home loan again. To alleviate the anxiety, it’s important to get the facts straight.
Different loan types can affect the waiting period one must take to qualify for a particular loan (this can range anywhere from 2-8 years). Extenuating circumstances can also play a role in this waiting period.
Although the challenge to build up your credit score from the bottom sounds challenging, it is worth it and of course – possible.
What is a Foreclosure?
Before discussing the process and requirements to get an FHA loan, let’s talk about what foreclosure means and its impact on a person’s credit history.
A foreclosure is a legal process wherein the lender takes away your property as a consequence of missing 4 consecutive mortgage payments and sells it to satisfy the debt that you owed.
Of course, this kind of negligent payment behavior reflects badly on the borrower, thus affecting their chance to get another loan later down the line. This also reflects badly on a person’s credit score, further hampering their chance of getting another home loan.
Its Impact on Your Credit Score
The foreclosure will appear on your credit report a month or two after the lender begins the foreclosure proceedings. These are its impact on your credit score:
- The foreclosure will remain on your credit report for 7 years, starting from the date of the first missed payment that led to the foreclosure. After the 7-year waiting period, it will be deleted from your report.
- The missing 4 consecutive months of payment will impact your credit score more than the foreclosure. Moreover, missing payments from other debts can create a compound effect.
- The higher the credit score, the bigger the impact. According to FICO, if your starting credit score is 680, you can expect your credit score to lose 85-105 points. If your starting credit score is 780, you can expect to lose 140-160 points.
Can I Qualify For an FHA Loan After a Foreclosure?
Now that we understand what a foreclosure is and its impact on your credit score, let’s talk about the FHA loan and your eligibility as an individual with a history of foreclosure.
The FHA requires a 3-year waiting period after a foreclosure to get an FHA loan.
This is considerably lower than most conventional loans that require a 7-year waiting period (the same time that the foreclosure falls off your credit history).
FHA loans are known to be lenient to their borrowers, requiring a minimum credit score of 580 to put a down payment of 3.5%. It is also more forgiving with individuals with a history of bankruptcy, debt, and of course, foreclosures.
When Does the Waiting Period Begin?
If the previous mortgage that was foreclosed was financed by the FHA, the waiting period begins when the Department of HUD issues the mortgage insurance claim to the lender. If it was not financed by an FHA loan, it starts on the day your home was sold.
Unfortunately, sometimes there are delays in these processes. It can be unfair because although you left the property already, the clock on the waiting period did not begin yet.
Exceptions to the 3-Year Rule
Being exempted from the 3-year waiting period is very rare and is only granted for truly extenuating circumstances that are beyond your control.
According to HUD 4000.1, an example of this is a serious illness or death to the primary wage earner who was responsible for paying the mortgage. Situations like divorce are considered difficult but not necessary “beyond your control”.
Find an approved FHA lender and talk to your loan officer about your options.
FHA Mortgage Requirements After Foreclosure
Aside from the 3-year waiting period, the requirements to get an FHA loan after foreclosure follow the same standard FHA loan requirements. These include:
- Credit score: You need a credit score of 580 to be eligible for the 3.5% down payment. If your credit score is 500-579, your minimum down payment requirement is 10%.
- Debt-to-income ratio: Your DTI should not exceed 43%.
- Proof of employment and stable income: Employment and income history for the past two years must be passed to ensure your financial capability to pay off your loan.
- Mortgage insurance: Mortgage insurance premiums (MIP) is a way to protect lenders against the loss in case a borrower defaults. It will be paid for the entire duration of your loan. You can lower your MIP later on through streamline refinancing.
During the waiting period, it is essential to reestablish your credit history. You should also have no outstanding collections and recent bankruptcies.
The Bottom Line
Going through a foreclosure can seem like the end of the world. But just like most things in life, time heals everything. Rebuilding your credit score will take time too.
For FHA loans, waiting 3 years after the foreclosure and fulfilling the standard requirements will be enough to qualify. If you still have more questions or want to check eligibility, we can help. It takes under 30 seconds and it’s 100% free.
Frequently Asked Questions
Will my credit score go up when my foreclosure falls off?
When the foreclosure falls off your credit report, it will have no negative impact and will naturally improve over time. However, you can jump-start building up your credit instead of waiting for it to fall off by making on-time payments and keeping relatively low balances.
What is FHA foreclosure seasoning?
The FHA requires a 3-year waiting period from the date the HUD issued the mortgage insurance claim to the lender.
What kind of loan do I need to buy a foreclosure?
You can use any loan to buy a foreclosure. A government-backed loan like the FHA, VA, or USDA loan will be cheaper. If the property is damaged, the FHA 203(k) loan can be an option as it rolls the mortgage and the repairing fees into one loan. The maximum loan amount depends on how much you qualify for and where you live.
Should I buy a foreclosure for my first home?
The biggest benefit of buying a foreclosed home is savings. But although it’s cheaper, the process can be much longer and tedious with all the research and paperwork to do. Not to mention dealing with the lengthy delays. If you’re up for these potential challenges, then buying a foreclosure home can be the way to go.
