Life brings about so many circumstances which may result in hardships. Such hardships include medical costs, divorce, injury or disability, income reduction, or loss of job. Living through these items may result in credit issues. Extreme cases could even cause a home foreclosure. Eventually, in many cases, the desire is to become a home owner again.
As shown in this article, there is hope for a mortgage loan and it doesn’t take forever. Below are the required time frames required for a new mortgage. In all cases, it is key to re-establish good credit plus new rental / mortgage history after the circumstance.
While reading, keep in mind that there are exceptions to the foreclosure waiting periods below.
What is a Foreclosure?
A foreclosure, for one reason or another, results when a borrower is not able to pay the mortgage. Therefore, the mortgage lender sells the property to satisfy the mortgage. The mortgage lender’s goal is to capture as much of the mortgage payoff as possible. The late payments and eventual foreclosure causes serious damage to credit scores. Yet, below it will show that with a little time and new credit, buying again is possible.
VA Foreclosure Waiting Period
VA loans are the most lenient on previous foreclosures. Even if the foreclosed loan was a previous VA loan! The foreclosure waiting period is only 2 years. Although, it is possible for VA loan approval after just 1 through 2 years removed from a foreclosure. In order for that to happen, there must be re-established credit. Additionally, the cause must have been beyond the control of the borrower. FYI, divorce is not generally considered as beyond control of the borrower.
VA Foreclosure and Bankruptcy Rule Clarification
Recently, VA provided clarification to some guideline gray areas including a foreclosure in conjunction with a bankruptcy. Previously, there was confusion on when the re-established credit date starts. Now VA guidelines state if a foreclosure is in conjunction with a bankruptcy, use the latest of the bankruptcy discharge date or transfer of the home title. Whichever date is latest starts the new credit review period. By the way, the same is true for short sales and deed in lieu of foreclosure as well.
Keep in mind that if the foreclosure was a VA loan, the loss usually reduces the Veteran’s entitlement. Although, using bonus entitlement allows a Veteran to use VA again or even have multiple VA loans at once.
FHA Foreclosure Waiting Period
During fiscal year 2018, FHA endorsed 1.06 million loans including 776,284 purchase loans. As the HUD secretary Ben Carson mentioned its, “Core mission to facilitate safe and affordable mortgage options for qualified borrowers”. Fortunately, the FHA definition of “qualified borrower” is very flexible. Insuring over 1 million loans in a year certainly proves FHA looks to make home ownership possible. Therefore, even in the case of a foreclosure, FHA understands that life happens. Generally, the FHA foreclosure waiting period is 3 years.
How to Figure 3 Year Foreclosure Waiting Period
The 3 year waiting period starts with the property title transfer date. This means the date which the home is deeded out of the owner’s name. Although, this guideline causes a lot of complaints when a lender takes forever to complete the foreclosure process. For instance, a borrower may move out of the home and then years later the foreclosure deed is recorded. In this case, it is when the property is deeded out of the owner’s name and not when the borrower moves out.
Then, the 3 year period ends at the date of the FHA case file assignment. During the FHA mortgage process, the lender will request the FHA case file assignment. So, it is key that the case number is assigned at least 3 year and 1 day after the foreclosure deed is recorded.
FHA Foreclosure Waiting Period Exception
In case of extenuating circumstances, an exception may be granted. But, extenuating circumstances are strict. For instance, job relocation and divorce are not an acceptable reason. Although, if the mortgage was current at time of a divorce, the ex-spouse received the property, and then the property was foreclosed, there would be an exception. Exceptions to the 3 year foreclosure rule allows serious illness or death of a wage earner as long as there is re-established good credit.
USDA Foreclosure Waiting Period
USDA Rural Development guidelines lump foreclosures, short sales, and pre-foreclosure sales into the same category. Therefore, the foreclosure waiting period along with the others is 3 years. Like FHA, USDA treats a divorce situation where the mortgage was on-time at divorce, awarded to the ex-spouse, and then foreclosed as an exception.
USDA Foreclosure Exceptions
There are exceptions which USDA allows lenders to make when warranted. The first involves a temporary situation. Basically, the issue was temporary, beyond the borrower’s control, and was resolved at least 12 months prior to application. Examples include job loss, reduction in benefits, illness, or dispute over payment for defective goods or services.
Another possible exception involves reducing the housing expenses. USDA sees a 50% drop in housing expense as a reason to provide an exception. This would put the borrower in a much better situation. The underwriter will consider the overall strength and circumstances involved.
With lenient foreclosure requirements, flexible credit guidelines, and financing with no down payment required, why not use USDA?
Fannie Mae Foreclosure Waiting Period
When it comes to a foreclosure waiting period, conventional loans are most strict. The Fannie Mae general foreclosure waiting period is 7 years from deed transfer. But, there are exceptions for documented extenuating circumstances. If there are extenuating circumstances and between 3 – 7 years from foreclosure date, there are additional guidelines. These include:
- Maximum LTV is the lesser of 90% or program requirements
- Purchase of primary residence
- Limited cash out refinance for all occupancy types
Keep in mind that a second home or investment purchase as well as cash out refinances are not permitted until 7 years have passed.
Foreclosure and Bankruptcy on Same Mortgage
If a mortgage was discharged through a bankruptcy, the bankruptcy waiting period applies. Otherwise, if there was a foreclosure and a bankruptcy, the greater of the two waiting periods apply.
Freddie Mac Foreclosure Waiting Period
Even though Freddie Mac is a conventional loan like Fannie Mae, they do have their differences. Sometimes Fannie has the advantage and vice versa. When it comes to previous foreclosures, Freddie Mac wins. If the borrower’s credit score is 680 or greater, the foreclosure waiting period is 5 years. But, if there are extenuating circumstances, 3 years is sufficient.
Additionally, Freddie Mac requires re-established, good credit for 24 months including a housing payment.
Buying a Home With a Foreclosure
Even though a foreclosure is a difficult situation to experience, owning again is very possible. Plus, buying a home with low to no down payment after foreclosure is possible. Obviously, there are several options and each program has its own benefits. So, speaking with an experienced mortgage loan officer is a priority. We care about helping buyers who have gone through tough time achieve home ownership with affordable terms.