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.