If you are looking to finance a home purchase after a Foreclosure, you will need to know some important details before making application. We will cover Short Sales and Deeds in Lieu of Foreclosure in another post
First, it is important to know how lenders define a Foreclosure.
Foreclosure: When a creditor (Lender/Bank) repossess/takes back a home that had a mortgage/note that was not being paid for a specified period of time.
Once the Deed and Title to the property is reassigned to the Lender/Bank that held the note/mortgage on that property we have a Foreclosure. In some states the Lender/Bank must go through the court system and formally serve the owner with a notice of intent to foreclose; sometimes referred to as a “Lis Pendens.” If the owner is able to sell the home either through a short sale or regular sale, before the Foreclosure is complete, it is not considered a Foreclosure; it is considered a Pre-Foreclosure Sale and not part of the following rules and guidelines.
The following rules and guidelines are currently in place as of the publishing of this post. We will do our best to keep this post updated as changes are made. The easiest way to break this down will be by Loan Type. As always, if you have specific questions please email or phone us.
Currently there is a SEVEN year waiting period for borrowers with a Foreclosure on their credit to qualify for Conventional (non-Government) loan programs. The seven years are calculated from the date ownership was transferred. This would be the date that the new Deed was filed showing that the Lender/Bank officially owned the property.
For those borrowers that had experienced an “Extenuating Circumstance” the timeline is reduced to THREE years. The definition of an Extenuating Circumstance is “ Non-Recurring and was beyond the applicants control which resulted in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations.” Divorce and the impact of the economy are generally not acceptable reasons. I say generally because in some situations a case can be made.
For those borrowers that are past the Seven or qualify for the Three year waiting period; re-establishing credit is mandatory. Here are the points to keep in mind:
Credit must be up to date as of the date of application
Minimum of 4 Credit References open for 24 months
1 Must be a Traditional Credit Source – ie: Credit Card or Car Payment
1 Must be Housing Payment – ie: Rent
2 References may be Non-Traditional – ie: Auto Insurance or Cell Phone
No more than two 30 Day Late payment over the past 24 months
No Late Housing/Rent Payments since the date of Foreclosure
No New Judgments, collections, garnishments, liens or foreclosures since Foreclosure
Currently there is a THREE year waiting period for borrowers with a Foreclosure on their credit to qualify for FHA loan programs. The three years are calculated from the date ownership was transferred. This would be the date that the new Deed was filed showing that the Lender/Bank officially owned the property.
For those borrowers that had experienced an “Extenuating Circumstance” an exception can be granted at any time within the Three year waiting period. For FHA, Extenuating Circumstance includes “serious illness or death of a household wage earner, but does not include the inability to sell the house due to a job transfer or relocation to another area.”
The re-establishment of credit is necessary for borrower within the Three year waiting period.
With VA guidelines the existence of a previous foreclosure does not disqualify the loan by itself. However, it has been our experience, that qualifying within 24 months has been difficult to accomplish. The VA has the following rules for qualifying inside the 24 month window:
Applicant or Spouse has re-established credit since the date of Foreclosure and can show that the foreclosure was caused by extenuating circumstances beyond their control.
Divorce is not generally viewed as being beyond the control of the applicant or spouse
We hope you found this easy to understand. While it is as complete as possible in this format, there are other nuances that need to be taken in to consideration. We are happy to answer any specific questions you may have or assist you in obtaining financing.