Reader question: “I went through foreclosure in 2009, and I’ve been renting since then. I would like to buy another home later this year in 2014. The problem is the foreclosure is still showing up on my credit report. Is it possible to get financing while it’s on there? Where can I get another mortgage loan with a foreclosure on my credit?”
I have some good news for you. Well, maybe. If your foreclosure was the result of an “economic event” that was beyond your ability to control — like a job loss, and/or a major reduction in overall household income — you could get an FHA-insured mortgage loan in as little as one year after the foreclosure event.
You didn’t specifically ask about the FHA program. But it’s currently the fastest way to get a mortgage loan with a foreclosure on your credit report. At least for those borrowers who meet the “economic event” criteria established by the Department of Housing and Urban Development (HUD). Here’s what you need to know about this rule change…
New Rule for Getting an FHA Mortgage After Foreclosure
The FHA rule change was announced in the fall of last year. It shortened the “waiting period” to 12 months for certain borrowers who have been through a foreclosure, short sale or bankruptcy. The new rule is effective through the end 2014, and possibly beyond. Previously, borrowers had to wait much longer to get another FHA mortgage with a foreclosure on their credit record, up to three years in some cases.
For complete details, just do a Google search for “HUD Mortgagee Letter 2013-26.” That was the letter that announced the rule change back in August of 2013. Here’s what it says about borrowers who have been through foreclosure and still have it on their credit reports:
Borrowers that may be otherwise ineligible for an FHA-insured mortgage due to waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales … may be eligible for an FHA-insured mortgage if the borrower (A) can document that the delinquencies were the result of an Economic Event as defined in this letter, (B) has completed satisfactory Housing Counseling, as described in this letter, and (C) meets all other HUD requirements.
That’s the FHA. But what about conventional financing? Where can you get a standard or “regular” mortgage loan with a foreclosure on your credit report? The good news for you is that four or five years have passed since you were foreclosed on. This will put you past the minimum waiting period required by most lenders (though some may implement a stiffer waiting period of five to seven years).
Whether you decide to pursue an FHA or a conventional loan, there are certain commonalities:
- If you can document extenuating circumstances that led to the foreclosure, you’ll be able to get a loan sooner.
- If you have reestablished a pattern of good credit since the event took place, you’ll have an easier time qualifying.
Remember those two phrases in green font. They are the key to getting another mortgage loan.
It Can Stay On Your Credit Report Up to Seven Years
As you’ve said, the foreclosure is still on your credit report. That’s perfectly normal. By law, it can stay on your report for up to seven years. But that doesn’t necessarily mean you have to wait seven years to take on another mortgage. In fact, it’s possible to get approved for another loan even while the foreclosure is on your credit report.
According to MyFICO, the company that invented the FICO credit-scoring model:
…it’s a common misconception that [a home foreclosure] will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years … a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score.
So while a foreclosure can stay on your report for up to seven years, it’s still possible to improve your score during that time (after the initial damage). It’s also possible to get another mortgage loan before seven years is up, even with the foreclosure still on your report.
Refer back to those key phrases from earlier: “extenuating circumstances” and “pattern of good credit.” If you have financially rebounded from the event, meaning you have reestablished a pattern of responsible financial behavior, you’ll have an easier time getting approved for another home loan. Additionally, if you can show that extenuating circumstances (factors beyond your control) were the cause of your foreclosure, you might qualify sooner — in as little as 12 months with the FHA program.