How to Get a Mortgage After Foreclosure

Banks Editorial Team · November 17, 2017

Are you struggling to secure a new mortgage after going through a foreclosure?

Chances are you are still reeling from the experience and searching for the best way to move forward.

While the idea of applying for a loan may seem daunting after a recent foreclosure, you may very well qualify for another mortgage. In short, getting a mortgage after foreclosure depends on the circumstances of your situation — in addition to how you have used your credit since the real estate ordeal.

How long do you need to wait to apply for another mortgage?

For a conventional mortgage, prospective buyers who have experienced a foreclosure usually need to wait seven years. However, the U.S. Department of Agriculture and the Federal Housing Administration (FHA) require a much shorter wait of just three years, and the U.S. Department of Veteran Affairs is willing to approve mortgage applicants who have undergone foreclosure after two years.

Some lenders will make exceptions

Candidates can reduce the time they need to wait by proving the foreclosure was the product of a major financial hardship from which they have since recovered. Layoff, business failure, and major health issues are typically considered legitimate reasons.

The FHA, in particular, is very specific about what they believe to be a significant financial hardship. Events such as illness or death of a loved one meet their criteria in most cases, but circumstances like divorce may not. Whatever you claim, make sure to provide documentation of the hardship — for example, copies of paid medical bills or your spouse’s death certificate.

Prove that you have recovered from the hardship

Rebuilding your credit is crucial to your recovery, as potential borrowers want to be assured that you are in good financial standing to pay off your loan. To put it bluntly, they do not want to take a risk on someone who might default.

Document everything, including your pay stubs and tax returns, to increase your chances of being approved for a new mortgage. Mortgage applicants who have experienced a recent foreclosure must demonstrate their recovery from the event that caused them to default in the past. As such, candidates must prove they are paying their monthly bills on time and maintaining a low credit utilization ratio. Similarly, they must show that their credit score has improved since the foreclosure.

Consider applying for an FHA loan

Insured by the federal government, FHA loans are among the best options for foreclosed-upon mortgage applicants. While large banks such as Bank of America and JPMorgan Chase require high credit scores for candidates to be approved, smaller banks are often much more lenient. FHA loan programs vary from state to state, but consistent eligibility requirements include a debt-to-income ratio of less than 43% and a minimum credit score in the 500-580 range. These loans also require a 3.5% down payment.

Getting a mortgage after foreclosure is no small feat. It is a daunting process for those who are still grappling with the experience of having their home foreclosed upon.

With a positive outlook and the proper steps toward financial recovery, getting another mortgage is definitely within reach.

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