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Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Is buying a home becoming more affordable? See the new "Salary you need to buy a median-priced home in the top 50 metro areas"

Home Loan After Foreclosure? Easier Than You Think

green-light-for-loan-after-foreclosureYou might be wondering if it's possible to buy a house after foreclosure. It is.

  1. You will have a waiting period for a prime mortgage with a foreclosure
  2. You can get a home loan after foreclosure very soon with private or portfolio lenders
  3. Your waiting period depends on the foreclosure cause -- if it wasn't your fault, and your finances have improved, you may be able to buy sooner

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

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Time is on your side

If you put a little distance between your foreclosure and your next home application, you may qualify for prime mortgage rates. Here are the STANDARD waiting periods imposed by most traditional mortgage programs:

  • FHA loans: 3 years
  • Fannie Mae and Freddie Mac: 7 years
  • VA (veterans and military): 2 years
  • USDA (rural and some suburban housing): 3 years

The standard waiting periods apply if the foreclosure was not caused by situations over which you had no control. If you let your house go, for instance, because its value dropped, you get the standard waiting period.

Extenuating circumstances let you buy sooner

The Great Recession was hard on many consumers. And lenders understand that the fact that some have a foreclosure in their past doesn't impact their ability to repay a loan today. Lenders reduce your waiting period if your foreclosure was caused by "extenuating circumstances." "Extenuating circumstances" are events that you could not control or predict.

Here are the reduced waiting periods for traditional loans with extenuating circumstances:

  • FHA loans: 1 year
  • Fannie Mae and Freddie Mac: 3 years with at least 10% down
  • VA home loans: 1 year
  • USDA mortgages: 1 year

Keep in mind that Fannie Mae and Freddie Mac require private mortgage insurance for loans exceeding 80% of the property value or sales price. And mortgage insurers may have stricter guidelines.

Related: How to Buy Foreclosure Homes

What are extenuating circumstances?

Extenuating circumstances can be involuntary reductions in income, increases in expenses, or a combination. For instance, a medical condition costing thousands of dollars combined with your inability to work for an extended time might be an extenuating circumstance. The death of a wage earner also counts.

Job losses are tricky -- if the major employer in your town shut down and laid everyone off, you have a better case than you do if you were fired for incompetence.

Most lenders do not consider divorce an extenuating circumstance. The inability to sell your home or a drop in property value doesn't count either. Neither does taking on too much debt and being unable to make the payments. And you may get little sympathy if your sky-diving hobby caused the injuries that kept you out of work. It really comes down to how much of the problem was caused by choices over which you had control.

Early home loan after foreclosure? Convince your lender

In order to get a prime mortgage with a foreclosure, without the standard waiting period, you must prove three things:

  • The foreclosure was not under your control or your fault
  • You have recovered financially from the event
  • The event is unlikely to occur again

For example, Jeff was a business owner in a ski resort town. A record-breaking storm cause highway closures that kept customers away during the crucial holiday period in which he earned half of his annual income. And he had a store full of winter clothing that he had to pay for but would be out of style the next year. He lost his home.

Three years later, Jeff was able to prove that the foreclosure was beyond his control. He supplied newspaper accounts about the storm and his own accounting records. He proved that he had recovered financially by supplying recent tax returns. And he demonstrated that he had an emergency fund large enough to cover six months of expenses even if he lost all income.

Finally, it helps if you can show the lender that you have re-established credit. That means opening up a new account or two (if necessary) and paying on time and in full without fail.

Related: Can You Build Credit by Paying Rent?

In a hurry? There's a loan for that

If you want to buy a house after a foreclosure right away, you can. Some non-prime lenders will finance you one day after a foreclosure or a bankruptcy discharge. But you'll pay for the privilege.

One Southern California lender will finance your home purchase one day out of foreclosure and with a credit score as low as 500. But your interest rate will be several points over prime and you'll need 25% down.

Other alternatives include seller financing, lease options and assuming someone else's loan.

Buy a house after foreclosure? Think first

Just because you can do something doesn't always mean you should. Here are a few items to consider before attempting homeownership after foreclosure:

  • How much do you owe on other debts?
  • Would your mortgage payment exceed your current housing expense? Where would the extra money come from?
  • Do you have an emergency savings account?
  • Do you have medical insurance?
  • Is your marriage stable?
  • Is your job, career and industry healthy?
  • Do you expect to remain in the same location for at least several years?

Your next mortgage lender will want to know that you're ready and able to be successful at homeownership. So before you prove it to a lender, you must prove it to yourself.

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