The National Association of Realtors (NAR) estimates that between 2006 and 2014, 9.2 million people in the United States lost their homes to a foreclosure, deed in lieu of foreclosure, or short sale. This has caused the nation’s homeowner rate to fall from its highest level ever to the lowest one since 1965. Many of those who have lost their home to foreclosure feel as though this is the end of the road, and that they will never be able to purchase another one. If you are one of them, you may be surprised to know that you have far more options to obtain a second chance mortgage loan after a foreclosure than what you think.
Role of your Credit Score
Your credit score is a major factor lending institutions consider before determining whether or not you are eligible for a loan. There are three major credit reporting bureaus: Experian, Equifax, and TransUnion. Each of these bureaus begin reporting foreclosures as soon as a lender claims you have missed your first payment. You must generally wait seven years before negative information against your credit report is removed. As such, your foreclosure may no longer be listed if you were one of the first to lose your homes during the Great Recession.
Foreclosures are not the only thing that can affect your credit score. You may also have negative reporting if you owe too much money on your credit cards or have defaulted on any of your other loans. If you are considering home ownership again, you should obtain a copy of your credit report from each of the three major bureaus (something you can do once each year for free). That way, you can see what is on it and take the necessary measures to clear up any issues.
Keep in mind that the credit report pulled by your lender may be very different than the one you obtain. Some loan officers claim that the report they receive is more detailed, and may contain a credit score that is between 40 and 60 points lower than the one consumers see. For this reason, you should not be discouraged to find that your lender has noted a lower score than what your own search has provided.
Factors Since your Foreclosure
Your credit score tells only part of the story. What lenders are most interested in is how you have recovered from your foreclosure or short sale. For example, they will likely be concerned with whether or not you have paid your other bills on time since then. Job stability will be another factor as those with a steady employment history will be looked upon more favorably. If you have since been reduced to part-time work or are self-employed, you can expect to be scrutinized more carefully.
Requirements Vary by Lender
Although most lenders are concerned with your credit history over the past seven years, some will only go back as far as three or four years. Others will take into consideration any hardships you may have had such as the loss of a job or a medical disability. In other words, do not be discouraged just because you are turned down by one lender because that does not mean you will be denied a mortgage by every other one.
Role of a Mortgage Broker
If you have unique circumstances, your best bet would be to work with a mortgage broker who is familiar with the unique challenges buyers with a previous foreclosure or short sale face. Mortgage brokers are aware of the different types of loans that are out there, and can “shop” around for you to ensure you get the best deal possible based upon your circumstances.
A few of the different types of loans a broker might be able to help you with include:
Federal Housing Administration (FHA) loans are one of the most common ones obtained after a foreclosure. These loans are typically available to those with a credit score of 580 and above along with a debt-to-income ratio of no more than 43%. An FHA loan can often be obtained in as little as two years, so you do not necessarily have to wait for your foreclosure to fall off of your credit report.
A 3.5% down payment is usually required. You may also be subject to Private Mortgage Insurance (PMI) if you borrow more than 80% of the home’s value. This typically runs about .85% of your loan’s value for a traditional 30-year mortgage.
Fannie Mae/Freddie Mac Loans
You must normally wait a full seven years before applying for a Fannie Mae or Freddie Mac loan. However, that could be reduced to two years if you have faced extenuating circumstances. According to Fannie Mae, extenuating circumstances must be non-recurring events that are beyond your control. You must also be able to document your extenuating circumstance by writing a letter explaining why you were unable to maintain your mortgage. Freddie Mac also requires third-party documentation to confirm that your situation significantly reduced your earnings or increased monthly expenses.
A credit score of at least 580 is required for either type of loan. Your debt-to-income-ratio must be 43% or less, and a 20% down payment may be required.
Veteran’s Administration (VA) Loans
An estimated one in three veterans are unaware they have home-buying benefits, making this one of the most overlooked methods of purchasing real estate after a foreclosure. In addition, veterans applying for a VA loan need only wait two years after a foreclosure before doing so, making it one of the fastest.
To obtain a VA loan, you must first obtain a Certificate of Eligibility (COE). This certificate can then be submitted to a VA-approved lender at the time you apply, and will be for a certain “entitlement” amount. This amount varies; however, a basic entitlement is usually somewhere in the neighborhood of $36,000. You can generally borrow up to four times the amount of your entitlement, provided you have sufficient income. A credit score of at least 620 is required for most VA loans as well.
Non-Qualified (Non-QM) Loans
Non-qualified or non-QM loans are the newest product for those wishing to purchase a home after foreclosure. Designed for those who do not qualify for other types of mortgages, non-QM loans are backed by private equity firms and hedge funds. Since there is a greater degree of risk, you could need to come up with a larger down payment, and may also be subject to a higher rate of interest.
Your ability to pay will play a huge role in whether or not you qualify. A minimum credit score of 500 and a loan-to-value ratio of between 70% and 80% is also required. So long as you have sufficient income and an adequate down payment, you can often obtain one of these loans without undergoing any waiting period whatsoever.
Thousands of Successful Transitions
More than one million people lost their homes between 2007 and 2008, which was when the housing bubble first burst. A good number of them have already purchased a new home, and thousands of others may be eligible because their foreclosure is no longer listed on their credit report. If you have previously suffered a foreclosure or short sale, you are not destined to rent forever. Many people are becoming homeowners again, and with some hard work and a great deal of research, you could easily find yourself joining them.