Can I Buy A House With A Foreclosure [PATCHED]
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
can i buy a house with a foreclosure
The moratorium on foreclosures due to the COVID-19 pandemic ended on July 31, 2021. Investors predicted a wave of foreclosures when the moratorium ended, but so far, there is no evidence that has occurred.
Many people who've gone through a foreclosure wonder if they'll ever be able to buy a house again. Credit reporting agencies may report foreclosures in your credit reports for seven years after the first missed payment that led to the foreclosure, longer if you're seeking a loan for $150,000 or more.
But sometimes, it might take less than seven years to get a new mortgage after a foreclosure. The amount of time you have to wait before getting a new mortgage loan depends on the type of loan and your financial circumstances.
Also, a foreclosure will cause a significant decline in your credit scores, making it more difficult to get a new mortgage. How much your scores will fall depends on the strength of your credit before losing your home. If you had excellent credit before a foreclosure, which is rare, your scores will go down more than if you'd already had late or missed payments, charged-off accounts, and other negative items in your credit reports.
Before June 20, 2010, the waiting period for a new loan following a foreclosure was five years. Now, to qualify for a loan under Fannie Mae or Freddie Mac guidelines, you must usually wait at least seven years after a foreclosure.
You might be able to shorten the waiting period to three years, measured from the completion date of the foreclosure action, for a Fannie Mae or Freddie Mac loan if extenuating circumstances (that is, a situation that was nonrecurring, beyond your control, and resulted in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations) caused the foreclosure.
To qualify for a loan that the Federal Housing Administration (FHA) insures, you typically must wait at least three years after a foreclosure. The three-year clock starts ticking when the foreclosure case has ended, usually from the date that the home's title transferred as a result of the foreclosure.
If the foreclosure also involved an FHA-insured loan, the three-year waiting period starts when FHA paid the prior lender on its claim. (If you lose your home to a foreclosure but the foreclosure sale price doesn't fully repay an FHA-insured loan, the lender makes a claim to the FHA, and the FHA compensates the lender for the loss.)
A lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the borrower's control, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure. Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower's mortgage was current at the time of the divorce, the ex-spouse received the property, and the mortgage was later foreclosed.
After a foreclosure, you'll normally need to wait two years to get a VA-guaranteed mortgage, maybe shorter if the event was beyond your control. Though in some cases, you might have to wait for three. For example, if you lose your FHA-insured home to foreclosure, you might have to wait three years before getting a VA-guaranteed home loan.
Notwithstanding the waiting periods, you have to establish good credit following a foreclosure before you can get another mortgage; your credit score must meet the lender's minimal requirements. And even if you're able to get a new mortgage with a relatively low credit score, you might have to make a larger down payment or pay a higher interest rate.
For around 20 years, Fannie Mae and Freddie Mac required lenders to use the "Classic FICO" credit score to evaluate borrowers' credit. On October 24, 2022, the Federal Housing Finance Agency (FHFA) announced that it would eventually require lenders to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to Fannie Mae and Freddie Mac. (The FHFA is the government agency that oversees Fannie Mae and Freddie Mac.)
An FHA-insured loan with a low down payment (3.5%) requires a score of 580. You could still qualify for an FHA-insured loan with a FICO score of 500 to 579, but instead of making a 3.5% down payment, your down payment would be higher, at least 10%. But because a foreclosure might cause your FICO score to drop by a hundred points or more, perhaps below 500, you might not qualify for a mortgage loan, even after the waiting period expires.
The FHA foreclosure waiting period is three years and applies to a foreclosure, a deed-in-lieu of foreclosure and a short sale, according to the U.S. Department of Housing and Urban Development (HUD).
USDA loans are backed by the U.S. Department of Agriculture (USDA). The zero-down-payment program caters to rural homebuyers with low to moderate incomes and requires a 640 credit score for automatic approval.
To get the ball rolling, you'll need to get in touch with the homeowner. Although door knocking is likely the most direct route, keep in mind that they may not have any desire to sell - and they may find your presence intrusive as well. Prepare to be empathetic to their situation.
And although the title search might present a challenge, some people do manage to buy a pre-foreclosure home with a conventional mortgage. If you get past the bumps, it's just like buying any home on the market - you submit an offer, and they accept it (hopefully). This is a plus for many homebuyers, because homes that actually foreclose can't be purchased with conventional home loans. So to prepare, you'll definitely want to get a pre-approval letter from your lender before talking to the homebuyer or making an offer. A pre-approval letter is not tied to a specific home, it just says that you're financially qualified to buy a home (up to a certain amount).
According to Street Directory, pre-foreclosures usually come in 20-50% below market value (though in this hot market, you might see smaller gains due to increased competition). The seller is incentivized to sell their home as fast as possible so that they can recoup at least some of their money, as well as avoid the negative impact a foreclosure would have on their credit score and future home-owning prospects.
An auction is the lender's first chance to try to get someone to buy a home that the previous owner defaulted on. The details for how these auctions work will depend on where you live, so check with city or county government websites for more information about auctions in your area. You will usually have access to information about the home before the auction, but you won't be able to tour it. Once the auction starts, you just need to bid as much as you're willing to spend on the home, whether the auction is in person or online."}},"@type": "Question","name": "What is an REO foreclosure?","acceptedAnswer": "@type": "Answer","text": "A real-estate owned (REO) foreclosure is another way of referring to a home that has gone through the foreclosure process and is now owned by the lender. If the lender, such as a bank, is unable to sell the foreclosure at auction, the property will be added to their REO inventory."]}]}] .cls-1fill:#999.cls-6fill:#6d6e71 Skip to contentThe BalanceSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.BudgetingBudgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps View All InvestingInvesting Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps View All MortgagesMortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates View All EconomicsEconomics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy View All BankingBanking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates View All Small BusinessSmall Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success View All Career PlanningCareer Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes View All MoreMore Credit Cards Insurance Taxes Credit Reports & Scores Loans Personal Stories About UsAbout Us The Balance Financial Review Board Diversity & Inclusion Pledge View All Follow Us
Budgeting Budgeting Calculator Financial Planning Managing Your Debt Best Budgeting Apps Investing Find an Advisor Stocks Retirement Planning Cryptocurrency Best Online Stock Brokers Best Investment Apps Mortgages Homeowner Guide First-Time Homebuyers Home Financing Managing Your Loan Mortgage Refinancing Using Your Home Equity Today's Mortgage Rates Economics US Economy Economic Terms Unemployment Fiscal Policy Monetary Policy Banking Banking Basics Compound Interest Calculator Best Savings Account Interest Rates Best CD Rates Best Banks for Checking Accounts Best Personal Loans Best Auto Loan Rates Small Business Entrepreneurship Business Banking Business Financing Business Taxes Business Tools Becoming an Owner Operations & Success Career Planning Finding a Job Getting a Raise Work Benefits Top Jobs Cover Letters Resumes More Credit Cards Insurance Taxes Credit Reports & Scores Loans Financial Terms Dictionary About Us The Balance Financial Review Board Diversity & Inclusion Pledge InvestingAssets & Markets Real Estate InvestingHow to Buy a Pre-Foreclosure HomeByElizabeth WeintraubUpdated on January 13, 2022Reviewed byThomas J. Brock Reviewed byThomas J. BrockThomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.learn about our financial review boardIn This ArticleView AllIn This ArticleWhat Is Pre-Foreclosure?What Is a Short Sale?Buying a Pre-Foreclosure HomeWhere to Find Pre-Foreclosure HomesReal Estate Bubble CommunitiesFrequently Asked Questions (FAQs) Photo: Purdue9394/E+/Getty Images 041b061a72