One of the most disappointing financial situations in life is foreclosure. Having a foreclosure on your credit report can make it difficult to get a mortgage later on.
However, that doesn’t mean it’s impossible to get a mortgage after foreclosure. With a good plan and the right approach, you can get qualified for a home loan later. Here’s what you need to know:
You Have to Wait a Few Years
First of all, there is a waiting period if you want to get a mortgage after foreclosure. How long you end up waiting depends on the type of loan you get.
To qualify for an FHA loan after a foreclosure, you need to wait at least three years. On the other hand, if you want a loan from Fannie Mae or Freddie Mac, you normally have to wait at least seven years. However, there are exceptions. For example, if you can prove that your foreclosure came as the result of unexpected and extenuating circumstances, you might be able to get a mortgage sooner.
Finally, if you are looking for a loan from a conventional lender, you might have to wait anywhere between two and eight years, depending on the requirements. Be up front with lenders about your foreclosure history and find out what they expect so you know what you face.
Improve Your Credit Score
A foreclosure can cause a big hit to your credit score. Depending on what your credit score was before your foreclosure, it might have dropped below a 500. You need to bring your score up by making on-time payments and reducing your debt. If you work hard at it, you can improve your credit score over the course of a year or two.
To qualify for an FHA loan, you need to get your score up above 500. If you want to take advantage of the low down payment option, your score needs to be at least 580. For other loans, it’s a good idea to get your score up to at least a 620 if you want a better chance of qualifying.
Come with a Larger Down Payment
If you have a foreclosure in your financial past and your credit score hasn’t surpassed the 700 mark, there’s a good chance you will need a larger down payment to qualify. For example, if you have a score that is less than 580 and you qualify for an FHA loan, you will need a 10% down payment instead of a 3.5% down payment.
Other lenders might have their requirements. You might need 10% or even 20% down to get a mortgage, depending on your credit score and how long ago your foreclosure was completed. A larger down payment can help smooth the way if you are interested in getting a home loan with a foreclosure in your past.
Be Prepared for a Higher Interest Rate
No matter your situation, there’s a good chance you will be stuck with a higher interest rate if you have a foreclosure in your past — especially if you haven’t been able to get your credit score back up above 680.
Your interest rate is based on your credit score and other factors related to your risk of potential default. As a result, if a lender thinks there is a bigger risk of you defaulting on your mortgage at some point, you are likely to see a higher interest rate, to reduce their risk. That means you could wind up paying thousands more over time in interest charges. But if you want to get into a home quicker, without waiting several years and trying to get your credit score up to scratch, it might be worth it to you.
When you get a mortgage after foreclosure, you have a few extra hoops to jump through, and you might need to be prepared to pay more upfront and in interest. However, it is possible with planning.