Waiting the appropriate amount of time to buy a home after a foreclosure can help you secure a mortgage with desirable terms. Mortgage lenders base approvals and interest rates on past and current credit history. Serious blemishes such as a foreclosure increase the likelihood of default on future financing, and this higher risk can result in a loan rejection.
What Is a Foreclosure?
Mortgage lenders require timely home loan payments, and developing a habit of missing payments increases the risk of foreclosure, the process in which a lender forces you out of the property and reclaims possession of the home. A foreclosure doesn't occur immediately after missing a single payment. Lenders tend to postpone foreclosing to give borrowers the opportunity to bring their home loans current. But if unable to resume payments, a home foreclosure can take place after 90 days.
Financing a New Home
Losing one property to home foreclosure doesn't mean that lenders will automatically deny you for future mortgage loans. Foreclosures are completely erased from your credit report after seven years, after which you can apply for a home loan or any other type of loan, and lenders will never know of this past issue. Fortunately, you don't have to wait the full seven years to apply for another mortgage. Anyone who loses a home to foreclosure can get approved for an FHA mortgage with favorable rates after three years. Other types of loans impose a waiting period of four to five years.
Getting a Mortgage before Three Years
Mortgage lenders and banks vary, and you may locate a lender who is prepared to offer mortgage financing before three years. Be cautious of these types of loans. Buying a new home prematurely doesn't always provide enough time to rebuild your credit score. Credit scores dip after a foreclosure, and regaining these points takes time. Buying a home before you've improved your score can result in a high mortgage rate and a higher monthly payment. The minimum score for an FHA mortgage after foreclosure is 620.
Tips to Buy after Foreclosure
Successfully rebuilding your credit is key to qualifying for a mortgage after foreclosure. Several techniques can help restore your credit rating. Timely bill payments are imperative to better credit, and improving your payment record will call for careful budgeting and living within your means. Lack of funds can contribute to missed payments, but acquiring a rent that's affordable and reducing expenditures create disposable income and enough cash flow to pay bills on time. Keeping debts low is another key factor to improving your score to buy a home after foreclosure. Use extra money to pay down credit cards and avoid taking out new loans to minimize credit inquiries.