- After a foreclosure, you must wait three years
- There are exceptions for this three-year period, but only in extreme cases.
- In addition to the time frame, you must adhere to the rules and guidelines of the normal FHA loan.
Those who have a history of foreclosure may be concerned about their ability to qualify for a house loan again. It is critical to establish the facts in order to reduce fear.
Different loan kinds might influence the amount of time it takes to qualify for a loan (this can range anywhere from 2-8 years). This waiting period can also be influenced by extenuating circumstances.
Although building your credit score from the ground up may appear difficult, it is worthwhile and, of course, doable.
What exactly is a foreclosure?
Before we get into the process and requirements for an FHA loan, let’s define foreclosure and its impact on a person’s credit history.
A foreclosure is a legal process in which your property is taken away by the lender as a result of missing four consecutive mortgage payments and sold to satisfy the debt that you owed.
Of course, this type of negligent payment behavior reflects poorly on the borrower, reducing their chances of obtaining another loan in the future. This also has a negative impact on a person’s credit score, making it more difficult for them to obtain another home loan.
Its Influence on Your Credit Score
A month or two after the lender initiates foreclosure procedures, the foreclosure will appear on your credit record. It has the following effects on your credit score:
- The foreclosure will remain on your credit report for 7 years, beginning with the date of the first missed payment that resulted in the foreclosure It will be removed from your report after a 7-year waiting period.
- The missing 4 consecutive months of payment will impact your credit score more than the foreclosure. Furthermore, missed payments on other debts can have a compounding effect.
- The higher the credit score, the bigger the impact. According to FICO, If you start with a credit score of 680, you can expect to lose 85-105 points. You can expect to lose 140-160 points if your starting credit score is 780.
Can I Qualify For an FHA Loan After a Foreclosure?
Now that we’ve discussed what a foreclosure is and how it affects your credit score, let’s talk about the FHA loan and your eligibility as a person with a foreclosure history.
To secure an FHA loan after a foreclosure, you must wait three years.
This is far less than the 7-year waiting period required by most traditional loans (the same time that the foreclosure falls off your credit history).
FHA loans are recognized for being forgiving to their borrowers, requiring a minimum credit score of 580 and a 3.5% down payment. It is also more forgiving of people who have a history of bankruptcy, debt, and, of course, foreclosures.
When does the period of waiting begin?
If the previous mortgage was financed by the FHA, the waiting period begins when the Department of HUD issues the lender the mortgage insurance claim. It begins on the day your home was sold if it was not financed by an FHA loan.
Unfortunately, these processes can occasionally be delayed. It may be unfair because, despite the fact that you have already left the property, the clock on the waiting period has not yet begun.
Exceptions to the Three-Year Rule
Exemption from the three-year waiting period is extremely rare and is only granted for truly extenuating circumstances beyond your control.
According to HUD 4000.1, an example of this is a serious illness or death to the primary wage earner who was responsible for paying the mortgage. Situations like divorce are considered difficult but not necessary “beyond your control”. Look for a lender and talk to your loan officer about your options.
FHA Mortgage Requirements After Foreclosure
Aside from the 3-year waiting period, the requirements to get an FHA loan after foreclosure follow the same standard requirements. These include:
- Credit score: You need a credit score of 580 to be eligible for the 3.5% down payment. If your credit score is 500-579, your minimum down payment requirement is 10%.
- Debt-to-income ratio: Your DTI should not be higher than 43%.
- Proof of employment and stable income: To ensure your financial capability to repay your loan, your employment and income history for the previous two years must be passed.
- Mortgage insurance: Mortgage insurance premiums (MIP) are a method of protecting lenders from loss if a borrower defaults. It will be paid throughout the term of your loan. You can reduce your MIP later on by streamline refinancing.
It is critical to rebuild your credit history throughout the waiting period. In addition, you should have no outstanding collections or previous bankruptcies.
A foreclosure can appear to be the end of the world. But, as with most things in life, time heals all wounds. It will also take time to rebuild your credit score.
Waiting three years after the foreclosure and meeting the standard requirements will suffice to qualify for an FHA loan. We can assist you if you have any further questions or want to check your eligibility. It takes less than 30 seconds and is completely free.
Will My Credit Score Improve When My Foreclosure Expires?
When the foreclosure is removed from your credit report, it will have no negative impact and will gradually improve. However, you can jump-start building up your credit instead of waiting for it to fall off by making on-time payments and keeping relatively low balances.
What does FHA Foreclosure Seasoning entail?
The FHA requires a 3-year waiting period from the date the HUD issued the lender the mortgage insurance claim.
What Type of Loan Do I Need to Purchase a Foreclosure?
You can use any loan to buy a foreclosure. A government-backed loan like the FHA, VA, or USDA loan will be cheaper. If the property is damaged, the FHA 203(k) loan can be an option as it rolls the mortgage and the repairing fees into one loan. The maximum loan amount depends on where you live.
Should I Buy a Foreclosure for My First Home?
Savings are the most significant advantage of purchasing a foreclosed home. However, while it is less expensive, the procedure can be significantly longer and more tiresome due to all of the research and paperwork required. Not to mention the interminable delays. If you’re willing to accept these risks, purchasing a foreclosure may be the way to go.