Individuals who have gone through a foreclosure can buy a home mere days after their foreclosure, if they so choose. The question is whether or not you can qualify for a mortgage after a foreclosure. The answer is still yes, but not right away.
A lender begins foreclosure proceedings after three missed payments (on average). A foreclosure has a negative impact on an individual's credit score, an impact that may have been compounded by mounting credit card debt and other late payments on other debts, such as utility providers. By the time a foreclosure finalizes, it is entirely possible that more than just the foreclosure has lowered someone's credit score. It will take time and effort, but credit can be rebuilt, allowing an individual who has recently gone through foreclosure to buy another house.
A foreclosure can stay on your credit report for up to seven years. The FHA will qualify individuals for a low-down-payment mortgage after approximately two years of wise spending habits after a foreclosure. Other lenders may offer a mortgage before two years, but the rates will be very unfavorable for the borrower. Depending on the extent of credit damage done, someone who has gone through a foreclosure should wait around two or three years to take on a mortgage loan. It will take that long to repair a credit score, making the borrower eligible for better interest rates.
During the couple of years before applying for another mortgage, it is important to not miss any payments or take on high amounts of debt. Lenders will want to see that you have corrected the problems that led to the foreclosure. Be sure to prepare a higher down payment during this time as well. That can lower your interest rate, offsetting the effects of the foreclosure on the interest rates you may be offered. A lower interest rate can make the difference of a few hundred dollars each month. Someone with a lower credit score, and higher interest rate, may be paying several hundred dollars a month in interest alone. Waiting a few years can ultimately save the home buyer thousands of dollars over the course of the loan.
Qualifying for a mortgage after foreclosure does not come cheap. Depending on your credit score, you could be paying 5 percent or more over current lending rates. Lenders will want to be well-compensated for taking a risk on you. Even if you have improved your credit score, the fact that you have gone through a foreclosure will probably affect the interest rates you are offered. Waiting a few years after a foreclosure, and making sure your recent credit history is solid, is the best way to avoid paying very high interest rates in order to buy a home.
To buy a home after a foreclosure, you may have to take out a subprime loan. These loans have higher interest rates and less-desirable terms. After the mortgage crisis in 2007-2009, subprime loans are not as easy to get, but they are likely to be the first mortgage you will be offered after going through a foreclosure.
Many lenders will offer you an adjustable rate mortgage (ARM) before they will offer you a fixed rate mortgage. Even if this does allow you to start out at a lower interest rate, it's likely you will pay more over the course of your loan than you would have with a fixed rate loan. An ARM mortgage is usually adjusted annually based on current mortgage interest rates. Usually, this means your mortgage payments will go up every year with an ARM.
Mortgages offered after a foreclosure usually include a prepayment penalty clause. This means you cannot pay off your mortgage early, to reduce the overall amount of interest paid, without being charged a fee. This most often becomes an issue if you want to refinance your loan, taking out a second loan to pay off the first. The second loan usually offers a lower interest rate or better terms than the initial loan.
The FHA (Federal Housing Administration) offers loans for those buying their first home, a home after foreclosure or bankruptcy, or those buying with limited or poor credit. They accept as little as 3.5 percent as a down payment, and keep closing costs low. An FHA loan is ideal for homeowners recovering from a foreclosure.
FHA loans are not actually offered through the government. They are offered through many regular lenders, with the mortgage guaranteed by the federal government. Because lenders will get their money, either from you or from the government if you default, lenders are more willing to offer you a mortgage with better rates than you might normally get without FHA backing.
Buying a home after a foreclosure is not as easy as buying a home with a high credit rating. Waiting a couple of years, building your credit back up and shopping around for the best loan can help, but you'll still feel the effects of the foreclosure on your credit score until it is removed seven years after it hits your credit report. Until that is removed, you'll probably be facing a higher interest rate and more difficulties qualifying for a home loan.
Foreclosures usually happen because of an interruption or reduction in the amount of income coming into the household. The mortgage is generally not the only bill to go unpaid during that time. A succession of unpaid bills can have just as much of an effect, if not more so, as the foreclosure, especially if those bills are more than 90 days late. If you've missed payments in the past, make sure you stay on top of them now before you apply for a mortgage to buy a home.
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