How to Get a Second Chance at Homeownership After Foreclosure or a Short Sale
Millions of Americans who lost their homes during the housing crisis may be eligible to become homeowners again.
From 2006 to 2014, more than 9.2 million Americans lost homes to foreclosure, short sales or deeds in lieu of foreclosure, according to the National Association of Realtors. For many who lost homes during the housing crisis, enough time has passed that they may once again be able to get a mortgage to buy another home – if they can meet today's more stringent qualifications.
"It's not a scarlet letter that stays with you forever," says Bob Walters, chief economist for the mortgage loan company Quicken Loans.
By 2015, about 1 million of those who lost homes between 2006 and 2014 had already bought homes again, according to the NAR. Many others may be eligible to purchase a home, perhaps sooner than they think.
"Their chances are very good depending on how they experienced a short sale or foreclosure and how they've handled their credit since," says Ray Rodriguez, regional mortgage sales manager at TD Bank in New York.
How long you need to wait varies by program. In general, you'll need to wait seven years after a foreclosure or short sale to get a conventional mortgage, three years to get a Federal Housing Administration or U.S. Department of Agriculture loan and two years to get a loan backed by the U.S. Department of Veterans Affairs.
But those time periods can be shortened to as little as one year for a VA or FHA loan and three years for a conventional loan, if borrowers can demonstrate their defaults were the result of a significant hardship from which they have now recovered.
"If you've had this event, you're most likely to get a loan if you understand why it happens, and you've taken steps to make sure it doesn't happen again," says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area. "Whatever you did wrong, you need to set yourself up so that it doesn't happen again."
The first challenge is to rebuild your credit. How long that will take depends on a variety of factors, from how many credit lines you have to how many payments you missed on your mortgage to whether your landlord reports prompt payment of rent to credit bureaus. Maintaining low balances on your credit cards, consistently making payments and avoiding derogatory marks on your credit report will all help your case.
"We want to see a strong credit score," Rodriguez says. "We want to see you pay your bills on time."
While some rules are hard and fast, others – such as what constitutes a hardship – will vary by lender. Plus, not all lenders participate in every loan program, which means that if you meet only the FHA requirements, you'll be denied a loan if your lender doesn't offer FHA loans. That makes it important to work with a mortgage broker or officer who can shop your case among multiple lenders and help put together a package that will persuade the lender that you're now creditworthy.
"It also varies according to the individual lender's interpretation of those guidelines," Walters says. "They should not assume that because Bank One said no that Lender Two will say no."
Someone who experienced a foreclosure or short sale may be asked to write a letter to the lender explaining the circumstances and detailing why it won't happen again. The lender also may require a larger down payment or more reserves.
But if they meet all the other qualifications, borrowers with a previous foreclosure or short sale are eligible for the same mortgage rates available to other borrowers.
"There's no additional hit on the initial rate," Elysia Stobbe, a branch manager at NFM lending in Jacksonville, Florida, and the author of "How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye." "People get treated quite fairly. There's not a black mark forever."
Here are six things to know if you are seeking a mortgage after a foreclosure or short sale:
Expect to wait two to seven years. Exactly how long you'll need to wait will depend on your circumstances and perhaps on your lender. Conventional loan guidelines call for a seven-year waiting period after a foreclosure or short sale, but that can be shortened to three years for foreclosure and two years for short sales if there were extenuating circumstances such as a serious illness from which someone has now recovered or a death in the family. FHA and VA may approve a new loan as little as a year after a foreclosure.
Your lender will see a different credit report than you do. The report lenders pull when you apply for a mortgage is not the same report you get from services that provide credit reports to consumers. "You're often getting a stepped-down version," Walters says. "A score is certainly important, but it isn't the be all, end all. There are other things in place that could potentially slow your loan." Stobbe says the scores she sees are usually 40 to 60 points lower than the scores on the reports consumers pull for themselves. And while your credit score is only one factor, you can figure at least 620 is needed for conventional mortgage and 580 is necessary for a FHA.
On-time payments will be important. Lenders want to do everything they can to make sure they don't lend to someone who is going to default again, so they will look closely at your bill payment record since the foreclosure. "The most important thing is re-establishing credit," Stobbe says.
You'll need to demonstrate job stability. If you have a traditional job for which you receive a W-2 form, your lender will verify your income with your employer. People who work several part-time jobs, especially if they are self-employed, will face additional scrutiny and will have to demonstrate their income with several years of tax returns and other documents. "Those people now find themselves having a very difficult time getting a mortgage," Walters says. "The products that used to exist to help those people are gone."
You'll need to document everything. The documentation required for all mortgages has increased significantly since the crisis, and lenders want to verify the financial information provided. "Anything that a customer puts on the mortgage application today, we are going to ask for paperwork to verify," Rodriguez says. "We want to be cautious and make sure we don't make the same mistakes again." Expect to produce pay stubs, bank and brokerage statements, tax returns and other documents if you want a mortgage.
Not all lenders will see your situation the same way. The basic guidelines are set by FHA, VA, USDA, Fannie Mae and Freddie Mac, but individual lenders and even individual underwriters may interpret them different ways. "Every lender is different, and they could have different requirements," Rodriguez says. "There is no one size fits all."