Can I Get a Mortgage Loan after the Foreclosure Process?

By Brandon Cornett
© 2011 All rights reserved

This question was sent in by Patricia from Maryland. She recently went through a foreclosure process, and she wanted to know if it would be possible to get another mortgage loan down the road. This article is an expanded version of Brandon's response to the question at hand: Can I get a mortgage loan after foreclosure?

Reader question: "We were foreclosed on about three months ago. For several years we paid all of our mortgage payments on time. But then my husband lost his job and we were unable to sell the house. Needless to say, we became another foreclosure statistic. We would like to rebuild our finances and become homeowners again someday. My question is, can I get another mortgage loan after the foreclosure process, and if so how long does it take?"

Unfortunately, yours is a very common question in the current economy. I don't need to tell you that we've seen a record number of foreclosures over the last few years. You hear about it every time you read the newspaper.

But there's actually a follow-up question you should be asking as well. You want to know if you can get a mortgage loan after foreclosure. That much is obvious. But you should also be asking: "What can I do in the meantime to improve my chances of getting a loan down the road?" I will address both of these questions through the course of this article.

The Short Answer

Let me start with the short answer, and then we'll get into the nuts and bolts after that. Is it possible to get approved for another mortgage loan after going through foreclosure? Yes, it is possible. But it may be a few years before you can qualify for another loan. It will probably be at least three years.

What Happens After Foreclosure

Let's talk about the series of events that usually occurs after a homeowner goes through foreclosure. When a bank forecloses on the home, they must get some form of court approval. In some states, the lender must actually go to court for this approval. In other states, they simply file the paperwork with the county and sidestep the judicial-review process. But in either case, there will be a court record of the foreclosure filing.

Foreclosures show up in the "public records" section of your credit report. This is also where bankruptcy filings, tax liens and other court judgments will appear. A foreclosure is considered a derogatory entry on your credit report. This means it will lower your credit score.

Remember, your FICO credit score is based on the information contained in your credit reports. They are two different things, but they are directly related to one another. So when a derogatory entry such as a foreclosure hits your credit report, it lowers your credit score. This is one of the challenges of getting a mortgage loan after going through foreclosure -- it hurts your FICO score for quite some time.

The foreclosure entry can stay on your credit report for up to seven years. This is in accordance with the Fair Credit Reporting Act, which is a federal law that regulates the reporting industry. After seven years, the derogatory item must be removed from your reports.

Fannie and Freddie Mortgage Requirements

You've probably heard about Fannie Mae and Freddie Mac. During the first part of 2011, they were in the news constantly. These two organizations buy mortgage loans from lenders and then sell them through the secondary mortgage market.

I could write an entire article about Fannie and Freddie, but this is not the time or place. Suffice it to say that most mortgage lenders want to sell their loans into the secondary mortgage market. They do this because it gives them more liquidity and less risk. But these lenders must ensure their loans meet certain guidelines established by Fannie Mae and Freddie Mac. If the loans do not meet those guidelines, the lender cannot sell it off their books.

What does this have to do with getting a mortgage loan after the foreclosure process? Plenty. Fannie and Freddie have certain rules about when you can qualify for a conforming home loan after a foreclosure. A conforming mortgage loan is one that meets the guidelines set forth by Fannie and Freddie.

• Fannie Mae has a five-year requirement for borrowers who have been through foreclosure. In other words, you must wait at least five years after your foreclosure before you can qualify for another mortgage loan.
• If you can document some extenuating circumstances, you might be able to get approved within three years after foreclosure.

You said that your husband lost his job, and that you were unable to sell your house. These are extenuating circumstances. So if you can document this with the mortgage lender, you might be able to qualify in as little as three years after foreclosure.

Freddie Mac, the other mortgage giant, has a seven-year requirement for borrowers who have been foreclosed upon. At least, that was the requirement in March 2011 when I published this article. There was also some talk of Freddie Mac lowering their requirement to five years after foreclosure, but I could not find any official statements about this.

So we can say with some degree of certainty that it will be at least three years after foreclosure before you can qualify for a conforming mortgage loan. If you don't have any extenuating circumstances, it will probably be at least five years before you can get another loan.

When the time comes, you might want to look into FHA home loans as well. From what I can gather, there is a three-year rule on FHA loans. So you might be able to get one of these mortgage loans three years after your foreclosure filing. FHA home loans also have the benefit of a smaller down payment, as little as 3.5% of the purchase price. In order to qualify for the lower down-payment program, you would need a credit score of at least 580.

And speaking of credit scores…

Down Payment and Credit Score Requirements

When you try to qualify for a conforming loan after the three to five-year mark, you'll also encounter certain credit and down-payment requirements. Of course, these guidelines could all change by the time you reach the three or five-year point. But as of right now, a borrower who wants to get a mortgage loan after foreclosure will need at least 10% down and a FICO credit score of 580 or higher.

In the beginning of my response, I said there were two key questions we needed to answer:

• The first question is, can I get a mortgage loan after foreclosure? We've covered that topic already. Yes, it's possible to qualify for a home loan after going through foreclosure. But it will probably be at least three years before you can get approved.
• The second question is, what can I do in the meantime to improve my chances of getting approved? So let's talk about that next.

I just mentioned you're going to need a down payment of at least 3.5% for an FHA loan, or 10% for a conforming loan. We also talked about the credit score requirements. Borrowers who have been through foreclosure will need a FICO credit score of 580 or higher to qualify for a conforming loan.

If you want to get an FHA home loan using the 3.5% down-payment program, you will also need a credit score of 580 or higher. So there's your magic number. Between now and the time you can apply for a loan, you should do everything you can to boost your credit score. You can aim for 580 as a minimum, but it would be better if you could get your score into the 600 range.

It may take some time to do this, depending on how much damage was done when the foreclosure hit your credit report. But it's certainly possible. A foreclosure filing can stay on your credit report for up to seven years. But the impact of that derogatory entry will fade over time. So it's possible to improve your score even while the foreclosure "lingers" on your reports. We have dozens of articles on this website that offer tips for boosting your credit score. Here's a good one to start with.

You would also be wise to save as much money as possible between now and the time you're ready to buy. Getting a mortgage loan after foreclosure will be a lot easier if you have a sizable down payment. If you can document those extenuating circumstances we talked about earlier, and you can scrape together a 10% down payment, you might get approved for a loan in as little as three years.

The Rules Change Often

I've said it before, but I'll say it again in closing. Nothing is permanent in the mortgage world. The "rules" change all the time, and there are exceptions to every rule. I already mentioned how Fannie Mae's requirements changed recently, regarding mortgage approval after foreclosure. So this article should not be taken as gospel.

If you want to know if and when you can qualify for a loan, you need to talk to a lender. Don't listen to what your real estate agent tells you. Don't trust the information "some guy" posted on a forum. Talk to a mortgage lender or broker. They'll tell you what your options are.