Mortgage After Foreclosure
- 8 min read
- Learn the qualifications if you have a negative event in your recent past.
- Focus on rebuilding your credit score.
- Following a household budget will prepare you for qualifying.
Foreclosure, Bankruptcy or Short Sale in Your Past? You May Qualify For FHA, VA, Fannie Mae, or Freddie Mac Mortgages.
Bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure do not disqualify you from FHA, VA, Fannie Mae, or Freddie Mac mortgages.
However, if you experienced any of these negative events in the last 7 years, you should expect the mortgage originator to ask you for documents regarding the bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure, and more scrutiny from the mortgage underwriting department. In other words, expect more hassle and a longer time to loan approval.
But lender rules regarding recent bankruptcies, short sales, foreclosures, or deeds-in-lieu-of-foreclosure are not the only challenges you will find in qualifying for a mortgage. Mortgage lenders want to see the following four qualities in home loan borrowers:
- Positive credit history
- Stable income history
- Low debt-to-income ratio
- Adequate down payment and reserves
Your damaged credit score and financial health are two big hurdles to cross. Let us look at your credit score first.
Credit Score Damage & Recovery
According to Fair Isaac & Co., the creator of the FICO credit score, credit scores drop a predictable amount for negative events. The typical time to recovery is also predictable, too. The table below shows how much FICO scores can fall, and how long it takes a score to rebound.
|Consumer A||Consumer B||Consumer C|
|Starting FICO score||~680||~720||~780|
|FICO score after these events, and the customary time to full recovery:|
|Short sale / deed-in-lieu / settlement (no deficiency balance)||610-630||605-625||655-675|
|~3 years||~7 years||~7 years|
|Short sale (with deficiency balance)||575-595||570-590||620-640|
|~3 years||~7 years||~7 years|
|~3 years||~7 years||~7 years|
|~5 years||~7-10 years||~7-10 years|
FICO score and bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure. Source: Fair Isaac & Co.
Your first task following a major negative event, such as one of those listed above, is to to develop a plan to rebuild your FICO score to a level mortgage lenders use as their minimum threshold. According the FHA, the minimum FICO score it will accept for an FHA-insured loan is 580. Loan originators can require a higher score for FHA loans, and most do. As a practical matter, strive for a 620 or higher FICO score. Why 620? Many lenders consider a 620 the borderline between a prime and subprime borrower, although other factors go into an applicant’s creditworthiness.
Take a hard look at your credit history. Get a no-cost copy of one of your credit reports from AnnualCreditReport.com, and review its contents. Read the Bills.com article Improve Your Credit Report to learn 10 ways to boost your credit score and make your credit profile more attractive to lenders.
No single action you take can reverse the damage caused by a bankruptcy, foreclosure, or short sale overnight. Think of your credit report as you would getting into shape physically. Paying your bills on time is like exercising regularly. Keeping your account balances low, which is called credit utilization, is like eating the right amount of food and not over-eating. Paying off old debts is like shedding fat. None of these actions are difficult on their own, but having good financial habits is like having a personal fitness plan — the results speak for themselves.
talk to one of bills.com's lending partners to learn if you qualify for a mortgage.
Make sure you have more than one credit line current. For example, FHA loans generally require a borrower to have two active lines of credit. Ideally, the credit lines should be separate types. A credit type is called a tradeline in the lending business. One type of tradeline is an auto loan. A mortgage is a different tradeline, as is a department store credit card. An example of two separate accounts that are in the same tradeline would be credit cards from Shell Oil and Exxon. The two oil cards would be viewed as a single tradeline, and would not carry the same credit score benefit as an auto loan and a department store credit card, which are viewed as distinct tradelines.
As mentioned at the top of this article, lenders want borrowers who have a positive credit history, stable income history, a low debt-to-income ratio, and adequate down payment and reserves. Creating a household budget prioritizes your expenses. If qualifying for a new mortgage is your top priority, a budget will put you on track to pay off your debts, which lowers your debt-to-income ratio, and help you put aside funds for a down payment.
Bills.com offers a household budget you can download and customize to your household's needs. Bills.com also publishes a guide to help you eliminate unhealthy debt and set long-term budgeting goals to help you qualify for a mortgage.
Each state legislature created unique foreclosure and anti-deficiency laws. Follow the links just mentioned to learn the foreclosure rules relevant to you.
Waiting Periods For Mortgage Qualification
The circumstances behind your bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure matter.
The FHA, which insures mortgages for investors who put their money into home loans, is in many instances the most tolerant of bankruptcies and foreclosures if the circumstances behind these events were once-in-a-lifetime occurrences beyond the control of the borrower. On the other hand, the FHA flatly disqualifies anyone who short sold an underwater home in an effort to buy a similar home nearby.
Fannie Mae and Freddie Mac have rules similar to the FHA’s. Both are more tolerant of people who strategically defaulted on their underwater homes.
The table below summarizes the 2012 policies of the FHA, VA, Fannie Mae, and Freddie Mac. Like all summaries, this may miss some subtleties found in the rules for each. If you have a recent bankruptcy, short sale, foreclosure, or deed-in-lieu-of-foreclosure and have your financial house in order, consult with several lenders to learn if you qualify for a mortgage. If you believe you qualify based on the information shown on this page, do not be discouraged if the first lender you consult turns you down. Loans to people with recent bankruptcies, short sales, foreclosures, or deeds-in-lieu-of-foreclosure take more time to process and document. If the lender you speak to is busy, he or she may take a pass on you in favor of other clients who need less time to qualify and close for a loan.
|Derogatory Event||Waiting Period Requirements||Waiting Period with Extenuating Circumstances|
|Bankruptcy - Chapter 7 or 11||2 years||1-2 years, and show: • Bankruptcy was caused by extenuating circumstances beyond his or her control, such as death of wage earner or long-term illness • Demonstrates ability to manage personal finances responsibly • Events leading to the bankruptcy are not likely to recur|
|Bankruptcy - Chapter 13||2 years||1-2 years, and show: • One year of the pay-out period under the bankruptcy has elapsed • All required payments have been made on time, and • Borrower receives written permission from bankruptcy court|
|Foreclosure & Deed-in-Lieu of Foreclosure||3 years||3-year requirement is waived if: • Documented extenuating circumstances beyond his or her control, such as death of wage earner or long-term illness • Demonstrates ability to manage personal finances responsibly|
|Short Sale||Ineligible if short sale was to: • Take advantage of declining market conditions, and • Purchase a similar or superior nearby, cheaper property||Eligible if borrower was current and: • Mortgage payments on the prior mortgage were current for 12 months prior, and • Installment debt payments were current for 12 months. Or, wait 3 years for eligibility if borrower was not current and: • Default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and • Demonstrates ability to manage personal finances responsibly|
|Bankruptcy - Chapter 7 or 13||2 years||1-2 years if • Borrower establishes satisfactory credit profile, and • Bankruptcy was caused by circumstances beyond the applicant’s control, such as unemployment, medical bills|
|Foreclosure||Ineligible if foreclosure was on VA loan|
|Deed-in-Lieu of Foreclosure and Preforeclosure Sale||Ineligible if DIL was on VA loan. Short sale not mentioned|
|Bankruptcy - Chapter 7 or 11||4 years||2 years|
|Bankruptcy - Chapter 13||2 years from discharge date 4 years from dismissal date||2 years from discharge date 2 years from dismissal date|
|Multiple Bankruptcy Filings||5 years (>1 BK in past 7 years)||3 years from the most recent discharge or dismissal date|
|Foreclosure||7 years||3 years Additional requirements after 3 years up to 7 years: • 90% maximum LTV ratios1 • Purchase, principal residence • Limited cash-out refinance, all occupancy types|
|Deed-in-Lieu of Foreclosure and Preforeclosure Sale||• 2 years — 80% maximum LTV ratios1 • 4 years — 90% maximum LTV ratios1 • 7 years — LTV ratios per the Eligibility Matrix||2 years — 90% maximum LTV ratios1|
|Bankruptcy - Chapter 7||4 years (one BK) 5 years (>1 BK in past 7 years)||2 years2|
|Bankruptcy - Chapter 13||2 years after discharge 4 years after dismissal 5 years (>1 BK in past 7 years)||2 years2|
|Foreclosure||7 years||3 years2|
|Short Sale or Deed in Lieu of Foreclosure||4 years||2 years2|
|Footnote 1: The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios for the transaction per the Fannie Mae Eligibility Matrix. Footnote 2: Acceptable credit reputation has been reestablished. Events causing the financial difficulties: • Were beyond the Borrower’s control, • Are not ongoing, and • Are unlikely to recur.|
Mortgage waiting periods. Sources: FHA, Fannie Mae, Freddie Mac, VA, Bills.com