How Long After Foreclosure Can You Buy a House?
Hey guys, Mike from Mike Buys Houses here!
After watching a few videos that we have made regarding foreclosures, a couple homeowners had reached out to me and asked how long after foreclosure do they need to wait in order to buy their next property? As excited as I was to explain this process to them, it is a long answer, so I thought I would make a post on it as well.
Depending on what type of loan you’re going after, what type of loan you had, your credit score prior to foreclosure, and the missed payments and extenuating circumstances that caused the foreclosure, the answer is really going to vary. However, the key things to understand are that foreclosures are going to have a negative impact on your credit score.
I know that sounds simplistic, but the reality is, it will take time and work to fix your credit score after a foreclosure. It’s going to take a consistent stretch of making payments on time, as the bank likes to see a long and continuous trend of good payments and a solution to the initial problem that caused the missed payments in the first place.
Personal Credit Score
One of the factors the bank will weigh heavily is if you had a good credit score prior to the foreclosure issue. If you can display that this was a one time issue that caused the foreclosure and you have made changes in your financial habits or other areas to make sure that this will never take place again.
The bank hates lending to anyone who has faced foreclosures in the past as they view this as a significant increase to the overall risk of default again. Since banks are in the business of making money, they will treat past performance as indicative of future probability, and increase the difficulty of proceeding.
Conventional Loans, Fannie Mae, Freddie Mac
If you were using a Fannie Mae or Freddie Mac or some other conventional based loan, it’s going to be about seven years before they are okay with another loan for a mortgage. At a bare minimum, you might be looking at a three year waiting period, but they will also typically require more money down as well as proof of extenuating circumstances if you go with the shorter waiting period.
Extenuating circumstances, as mentioned above, is if there was a one time event that caused you to miss your payments, such as the death of the primary earner in the family. They are not going to count something like divorce or simply not being able to sell the property or not having enough equity in the property as acceptable extenuating circumstances.
The event also needs to be unique in order to qualify as an extenuating circumstance. The bank really wants to feel good about this type of event never happening again.
So with any Fannie Mae or Freddie Mac loan, you are looking at a seven year wait after a foreclosure until you can start looking to get another mortgage through conditional lenders. With extenuating circumstances, you can get that down to three years.
F.H.A. and USDA Loans
If you’re trying to get an F.H.A. Loan after a foreclosure, then the minimum waiting period is going to be three years. Similar to conventional, Freddie Mac and Fannie Mae, F.H.A. Loans will allow you to use extenuating circumstances to shorten that period.
They don’t specify an amount of time on their website, but if you dig through enough of their content, they do discuss having a one year waiting period after extenuating circumstances or bankruptcy. So, in either of those instances, you may have a one year waiting period.
Again, you will need an acceptable extenuating circumstance to qualify for that one year, but they do present that option for you.
The last type of loan that I commonly hear being utilized after a foreclosure is a V.A. loan, and if you are able to use a V.A. loan to get a mortgage, you will have a two year waiting period after foreclosure. There’s no mention of extenuating circumstances on their website, so shortening that period may be tricky.
However, in the long term, two years is really a short period of time. That gives you enough time to improve your credit score and it gives you time to make a long and continuous track record of consistent payments after a one time hardship, which goes back to our first point on what the banks are looking for!
Options When Facing Foreclosure
When facing foreclosure or even after a foreclosure, it’s critical to understand all of your options for getting another mortgage, if you want to buy another property of course.
Your first option is going to be to just wait it out. In essence, do the time and simply put in the work to improve your credit and show a track record of consistent payments. It’s not glamorous, and it’s sometimes hard to hear, but often this is the best strategy.
Your gameplan, if I can make a recommendation, would be to use this time to your advantage! This is a blessing in disguise, like I said, as it allows you to focus on paying down your debt, saving money, and getting some of that unnecessary stress off of your plate. Make a list of all your current debt, then make a list of your monthly income and core expenses. Once you have both lists, you can start to allocate some funds to those ventures.
You will also start to see your bank balance increase as you start to get your finances together, which means that you will be able to have enough saved up to cover any down payments that FHA, Fannie, Freddie, or any other loan backer requires. Remember, they may require a higher down payment regardless of your situation, so plan for the worst and hope for the best.
This additional time also allows you an opportunity to put your hardship into context. Write down what caused the missed payments, everything that you were going through, and try to explain what happened in the past. This will not only help you with the banks, but also help you to understand how to prevent similar issues in the future.
Additionally, it is advisable to not open up any new loan accounts during this time period. It’s the same principle when applying for a mortgage you wouldn’t want to buy a car or open up a line of credit. Those events have an impact on your credit score and, thus, your ability to get a loan. Therefore, it is always advisable to give some time between events like this.
If you’re going to take the first route, just stick to the waiting periods we discussed earlier and you shouldn’t have any trouble getting your next loan.
The second option is to use a private or portfolio lender, as they will have much less strict standards and guidelines to follow. Now, you will pay for that via a higher down payment and higher interest rates, so it will cost you more, but they will be much less stringent as far as what they require.
Additionally, it is not like working with conventional lenders like a bank you have a conventional mortgage with, as these lenders have different methods and restrictions. If you are considering using a lender like this, reach out to me with any questions as I can help walk you through their requirements. Just keep in mind it’s going to be much more expensive than the traditional route.
I hope this helps provide some assistance if you’re facing foreclosure and hoping to get a property in the future. No matter where you are in the process, feel free to reach out to me at any time. You can call me at 267-984-4765 or fill out the form below and we can schedule some time to talk.
I love helping people learn how to sell their house, avoid foreclosure and similar issues, and improve their credit. If you need help with any of that, definitely reach out and let’s chat. I would love to help out.