Defaulting on your home loan and having to foreclose your property can be really painful. But at times, walking away from your home is the best, and only, solution you are left with.
But foreclosure is not the end of the world. Moreover, you are not alone going through the financial upheavals of foreclosure. As per the foreclosure data report of RealtyTrac for Jan 2014, 1 in every 1,058 homes in U.S received a foreclosure filing. This figure falls in the higher spectrum of foreclosure frequency. Also, as of August 2014, the foreclosure rate was 33.7%, 1.7% up from the last year.
The victims of foreclosure are often boggled by the question, “How should we go about getting a mortgage after foreclosure and how long do we have to wait to get qualified for getting a mortgage?” Here we have listed seven essentials of getting a mortgage after foreclosure.
1. To Rebuild Your Home, First Rebuild Your Credit
A single foreclosure can impact your credit score for as much as seven years. However, it’s never too late to set off on the road to recovery. Begin with working out a savings and expense plan. Take a close look at your current financial situation. Assess what resources you have for repaying the debt, how long will it take to regain control of your finances and how are you going to manage your current expenses. Small things can make big difference to rebuilding your credit.
a. Get credit and pay it on time, religiously
b. Pay your bills prior to deadlines
c. Cut down your debts from roots, one at a time
d. Avoid getting tempted on using credit cards
e. Check your credit report periodically and dispute errors, if any
Might we add, lowering of credit score is not as bad if the borrower can prove to the lender of having a good credit before the financial crisis struck him/her.
2. To Save the Day, Consult a Loan Expert
As if mortgage wasn’t complex enough in itself, things get even more bewildering when it comes to post-foreclosure mortgage. It’s okay to reach out to a trustable mortgage experts or federal agencies or HUD-approved housing counselors, for taking expert advices on your mortgage issues, be it looking for rental properties or resorting to subprime mortgages. One mistake borrowers often make is consulting a loan expert only after they try and fail to get the mortgage, one way or the other. The right approach is to consult the loan pro right after foreclosure and get an expert roadmap to the right mortgage. Moreover, mere consulting with a professional can make the things less hazier and more hopeful.
3. Get Your Paperwork in Order
Lenders have their hands full of borrower’s applications. Not having the right paperwork can derail your mortgage plan. On the other hand, having all the required documents ready while applying for a mortgage, will shorten the turnaround time significantly and allow for a smoother transaction between you and your lender.
4. Stress Not, FHA Comes to the Rescue
FHA (Federal Housing Administration) mortgage comes with three-year foreclosure waiting period. Comparatively, this is much shorter waiting period than for conventional mortgages by Fannie Mae/Freddie Mac. FHA mortgages are truly a financial blessing for defaulters with a history of bankruptcy, foreclosure and short sale, looking to take a fresh start.
Earlier, one had to wait for at least three years for applying for a FHA loan after they foreclose their property. But effective 2013, FHA announced to waive even this three-year foreclosure waiting period, if you can prove, in writing, to the lender that the foreclosure was caused by unique circumstances, beyond your control, cutting your income by 20% or more. Examples would be death, divorce or serious illness. The waiving request should also consist of the step that you have taken to get on top of your finances and improve your credit score.
The preliminary criteria for mortgage applicants for qualifying for FHA loans is –
a. Minimum credit score of 500
b. Downpayment of at least 3.5%
c. Income verification – W-2 or federal tax returns
5. Switch to Subprime Mortgages
The waiting period for conventional loans from Fannie Mae or Freddie Mac is seven years. For those borrowers who are expecting to rebuild their financial muscles sooner, such loans might not be their cup of tea. In such circumstances, it seems viable to resort to subprime mortgages. Simply put, subprime mortgages are given to applicants with lower-than-average credit scores who usually do not qualify for prime mortgages. For obvious reasons, these mortgages are given at a higher interest rate and big upfront fees. If nothing else works, this surely will!
6. If You Qualify for VA Loans, Cheers!
If you or your spouse happen to be a veteran or military personnel, things might get a little easier for you, as you qualify for loans guaranteed by the U.S. Department of Veterans Affairs. Popularly known as VA loans, these come with a two-year waiting period.
7. Try Your Hand at Fannie Mae/Freddie Mac Loans
To apply for Fannie Mae/Freddie Mac Loans, you must wait at least seven years after the foreclosure. But not many borrowers know that the seven-year waiting can be cut short to three years if you prove in writing that the foreclosure happened due to justifiable circumstances and that you intent to use the new mortgage to purchase your foreclosed property. Also, the seven-year waiting period applies only to conventional loans from Fannie Mae or Freddie Mac. Waiting period might differ for conventional loans from private lenders.
Applying for a mortgage after foreclosure might look like another humdrum pursuit. As a rebound borrower, you need to understand that financial setbacks are part and parcel of life. But as they say, there’s nothing in the world that can’t be set right with the right attitude and a little hope and sugar. So get yourself together, put your past behind you and move forward. Make a vow to diligently clean up your credit and replenish your savings and most importantly, be patient.
We are in no way proposing that post-foreclosure mortgage is going to be cake walk but if you take care of the above essentials, you can get the job done right!