Purchasing a home after foreclosure used to be an impossible task. Potential homeowners were forced to wait many years before they could even apply for a loan. Today, however, times have changed. With more and more people having suffered foreclosure, it became necessary to find a way to allow them to become homeowners again once their life was turned around. Luckily, there are several programs that allow you to purchase a home as soon as 12 months after a foreclosure!
FHA loans have two different methods of approving you for a mortgage after foreclosure. The standard FHA guidelines require you to wait 3 years after the date of the sale of your home in foreclosure. This is pretty typical as it allows you plenty of time to get back on your feet and bring your credit score back up after such a negative economic event. However, if you have special circumstances where you were forced to give up your home because your company closed, you became ill, or you became injured and unable to make an income, you might be able to have the waiting period decreased to just 12 months. This program is called the FHA Back to Work Program and it caters to people that had a one-time negative occurrence in their life that affected their financial life. These people have to be able to prove that the occurrence was simply a one-time thing and that they have bounced right back. The conditions surrounding eligibility for this program include:
- You must have undergone a negative economic event, such as a foreclosure
- You must be able to prove that you lost at least 20 percent of your income due to circumstances outside of your control
- You must be able to prove that you bounced back from the drop in income and are back to your previous level of income
- You must take housing counseling to ensure that you understand what you are getting yourself into
The Back to Work Program makes it possible for those that were forced out their homes to become homeowners again with low rates and low costs, both of which are provided by FHA loans.
Prior to this year, Fannie Mae required potential borrowers to wait four years after they foreclosed on their home to apply for a conventional loan. Today, however, borrowers only have to wait 2 years, which is a significant reduction in the wait time. The conventional program allowing quicker shorter wait times for a loan after foreclosure is called the Extenuating Circumstances Program; it operates in a similar fashion to the FHA Back to Work Program. In this program, lenders look for:
- Illnesses that prevented you from working
- Divorce that increased your expenses
- Injury that prevented you from working
- Job loss that occurred due to circumstances outside of your control
Fannie Mae requires that you provide ample evidence of the reason you suffered the economic event, much the same as the FHA requires. You have to be able to prove the circumstances and that you were not able to make adequate income to prevent the issue from occurring. Fannie Mae also requires that borrowers write a letter of explanation stating the issues and why they occurred as well as that the situation has been rectified.
VA loans are a little trickier to obtain after a foreclosure, depending on the type of loan you defaulted on. If it was a conventional loan, you will likely have to wait 2 years before applying for your veteran loan, but if you defaulted on an FHA loan, you might have to wait as long as 3 years to apply since the FHA loan is another government backed loan and the VA is hesitant to offer a guarantee on another loan that you could default on. The hardest process is obtaining a VA loan after foreclosure on a VA loan, however, since you have to use your entitlement. When you foreclosure on a VA loan, you lose the portion of entitlement you used for that loan. The lender then has to determine if you have any entitlement left to use on a new loan. If you have enough and your credit has bounced back enough, you can pursue a VA loan, but it might not be your best option.
Determining the rates, costs, and terms of the new loan after foreclosure is the most important thing to do. Assuming that you are better off with an FHA or VA loan is not the right decision – you have to compare each loan type to see how your foreclosure affected the loan you will be eligible to receive. In some cases, veterans are better off with FHA or VA financing while others are perfectly fine with the VA loan because they have plenty of entitlement left. If you are not a veteran, comparing the costs of the conventional loan and the FHA loan are crucial. The FHA usually has fewer adjustments to the rate and cost of the loan despite lower credit scores and a blemished credit history than conventional loans have. Taking the time to really research what you have and how it impacts your loan will help you make the right decision when you want to purchase a home after a foreclosure.