I lost my home: Buying a home after foreclosure

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Today, you may be wondering if buying a home after a foreclosure is possible. It is.

1. You will have a waiting period for prime financing
2. You can buy sooner with private or portfolio lenders
3. Expect to pay more if you finance soon after losing a home

Check your credit and determine what options — conventional, government, non-prime, and more — are available to you.

You’re not alone

If you’ve lost your home in recent years, you’re not alone. Between 2006 and 2014, over 9.2 million Americans lost homes due to foreclosure, short sales or deeds in lieu of foreclosure. But that was then, and this is now.

It pays to find out the facts and explore your choices. If you can prove that you’ve rebounded financially, you stand a better chance of becoming a boomerang buyer.

What to expect the next time around

Prepare for a steeper climb ahead, says Rick Sharga, Executive Vice President of Carrington Mortgage Holdings.

“Foreclosure, short sale or deeds in lieu of foreclosure can make it very difficult for a consumer to get the financing they need to buy another home. These items dramatically lower your FICO credit score,” he says. “And they stay on your record for up to seven years.”

Past foreclosures make you statistically more likely to default on a loan. And lenders don’t like the added risk.

“Expect to pay a higher interest rate and down payment,” he notes. “You may also need several months of cash reserves on hand to qualify for a loan.”

Waiting out the clock

Many lenders require a minimum waiting period after a foreclosure before you can apply for a new mortgage loan:

• three years for FHA loans
• seven years for Fannie Mae/Freddie Mac loans
• two years for Veterans Affairs loans
• three years for USDA loans
• other lenders have different waiting periods.

But you may be able to shorten some of this time. This requires proving that the foreclosure was due to a qualifying hardship. A medical disaster, layoff or business failure may qualify. This may get you Fannie Mae or Freddie Mac loan in as little as three years. And it may shorten the VA or FHA loan waiting period to only one year.

Document your hardship with receipts for paid hospital bills, news articles detailing your company shut down, or a police report showing that you were victimized by crime, for instance. Write a letter explaining that what happened was beyond your control and why it won’t recur.

If your foreclosure was over eight years ago, things should go smoother.

“In that case, there should be no additional complexities to financing your home,” says Chris Lewis with Angel Oak Home Loans. “You’ll simply qualify along the same lines of income, assets, credit and property to be eligible for traditional mortgage financing.”

I lost my home and now I want to buy again – what do I need to do?

Buying a home after foreclosure with an FHA, Freddie Mac, Fannie Mae, VA or USDA mortgage means abiding by their rules and waiting periods. Even then, you still might get turned down.

“But there are other choices if you’ve begun to repair your credit,” says Sharga. “For instance, loans might be available from private hard money lenders. Or lenders who offer non-prime mortgages could be an option.”

He says these loans are likely to have much higher interest rates than loans to those with excellent credit. “And they may demand higher down payments or cash reserves. More documentation could be required, as well.”

Private and non-prime mortgage lenders may cost you more. But borrowing from them can also help you rebuild credit. “That way, you can refinance later into a less expensive conventional loan,” Sharga adds.

Ways to help your cause

Want to improve your chances of getting a mortgage loan? Sharga suggests these tips:

• Make all credit payments on time. “This demonstrates a good payment history.”
• Pay down debt. This improves your debt-to-income (DTI) ratio, which lenders prefer to be 43 percent or lower. “Try to keep credit balances below 30 percent of your credit limit for each account.”
• Save as much as you can for the down payment. “Try to save at least three months of your own funds as cash reserves, as well.”-
• Create a letter explaining the hardship you’ve endured.
• Contact a variety of lenders and ask what they require.
• Be honest with lenders about your credit and past issues.
• Monitor your credit for six to 12 months before applying for a loan. You can access your credit report for free once a year at AnnualCreditReport.com.
• Know which kind of documentation you’ll need. “Often, a two-year employment history and at least two months of bank statements are needed. Be sure you have all the documents you need in order.”
• Don’t open any new credit accounts or a car loan immediately prior to applying for a mortgage.
• Think about buying a less costly home. “This will ensure that you can more easily make payments and build up equity faster.”

You’ll want to convince lenders that you can be a successful homeowner. Preparing to buy a home after foreclosure will help you become more debt-savvy and financially healthy.