If you’ve been through a foreclosure, you’ve crawled through one of the worst real estate ordeals there is. But that experience doesn’t mean homeownership has to remain forever out of reach afterward.
In fact, it’s much easier to qualify for a mortgage after a major credit event than you may think. It all depends on the circumstances of your foreclosure—and how you’ve managed your credit since.
So if you want to get back out there, here’s how to get a mortgage after foreclosure.
How long after foreclosure can I apply for a loan?
When it comes to the necessary waiting period between going through a foreclosure and applying for a new loan, every mortgage program is a bit different. But there are some general rules.
“For a conventional mortgage, a borrower who experienced foreclosure is required to wait seven years,” says Ray Rodriguez, regional sales manager at TD Bank.
On the other hand, the Federal Housing Administration and the U.S. Department of Agriculture require a three-year waiting period while the U.S. Department of Veterans Affairs requires a two-year wait.
How to speed up the process
You can reduce the waiting period for landing a new mortgage by showing that the foreclosure was the result of a significant financial hardship from which you have recovered.
So what’s considered significant? “I live to shop” definitely doesn’t count; legitimate reasons include a layoff, business failure, divorce, or major health problems.
Be prepared to provide documentation of the hardship you claim, such as proof of paid medical bills.
“You’ll need to provide an explanation letter, which should be short and focus on recovery from the event, rather than excuses for it,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Her sample sentence: “After my business failed, I landed a W-2 job with an excellent company doing the same thing I did before, but with a guaranteed salary and full benefits package.”
Just keep in mind that “there is no one-size-fits-all when it comes to lenders dealing with this situation,” says Rodriguez. Every lender has different requirements aside from basic guidelines set down by the FHA, VA, USDA, Fannie Mae, and Freddie Mac.
The FHA, for instance, is particular about what constitutes a significant financial hardship, says Fleming. A serious illness or the death of a wage earner may be acceptable, whereas divorce may not be. (You might have been able to work through a divorce, but not through illness or a death.)
How to rebuild your credit
For a potential borrower, a major component of landing a new mortgage is demonstrating that you have bounced back from the financial hardship that caused you to default in the past. Job one of proving that is rebuilding your credit and keeping it sparkling clean.
To boost your credit score—lenders typically like to see a score of at least 580—pay bills on time and maintain low balances on credit cards.
“Consumers should also frequently check their credit reports to ensure there are no inaccuracies that could negatively affect their chances of qualifying for a loan,” say Rodriguez.
Keep a paperwork file
Be prepared to document everything finance-related in your postforeclosure life, advises Rodriguez. That includes pay stubs, bank and brokerage statements, and tax returns. Lenders will ask for this paperwork to verify everything you put on your mortgage application as a precaution to avoid another potential foreclosure.
And save your pennies! Unless you’re using VA financing, you will probably need a larger down payment to secure a mortgage than you may have put down last time.
“Figure 10% minimum,” says Fleming. There may be exceptions, but they are rare.
What about nonprime lenders?
You can land a new loan immediately after completion of the foreclosure in most cases. But beware: It’s expensive, the fees and interest rate are higher, and usually the terms aren’t great, Fleming says. For instance, rather than a 30-year fixed loan, you may be offered only an adjustable-rate mortgage with a high margin.
How a mortgage adviser can help
Meet with an experienced mortgage adviser soon after your foreclosure so that you can begin to work on any other long-term issues that need to be addressed and fixed.
“The three legs of the qualifying stool are income, credit, and assets,” says Fleming. If one or two are weak, you’ll pay more for a loan or may not qualify. The best corrective action for a prospective home buyer depends on what leg is weakest.
Once you’ve worked on getting your credit score over a particular threshold, you may need to conserve cash if your liquid reserves are too low, or pay down your credit cards if your debt-to-income ratio is too high.
Bottom line: Your past does not predict your future when it comes to financing—in fact, a bad experience can often scare people straight.
“Many folks have rough times in their financial life, and then are excellent credit risks afterward,” says Fleming. “If you can demonstrate a willingness and ability to make payments in the future, you can get a loan to buy a home.”
Margaret Heidenry is a writer living in Brooklyn, NY. Her work has appeared in The New York Times Magazine, Vanity Fair, and Boston Magazine.