Reader question: “Like many Americans, my husband and I had our home foreclosed on when the housing market crashed. We had an ARM loan where the payments shot up like a rocket. It’s a long story you’ve probably heard before. What I want to know is how long we will have to wait to buy a house after a foreclosure process. I’ve tried to research this online, but I’m more confused than when I started.”
You can buy a house two days after going through a foreclosure — if you pay cash for it. I believe what you’re really asking is, how soon can I qualify for another mortgage loan. That’s a different story entirely. You might have to wait several years to get another home loan.
In a nutshell: If you have extenuating circumstances, you could qualify for a conventional mortgage backed by Fannie Mae or Freddie Mac within three years of foreclosure. If you cannot document any kind of extenuating circumstances, you’re in for a longer wait — possibly up to seven years. For FHA loans, the three-year rule applies in most cases.
There are some circumstances where the waiting period can be reduced. We will discuss those circumstances in a moment. But first, I want to explain why this subject is so confusing.
Why Is It So Confusing?
You’re not alone in your confusion. We get this question from one of our readers about once a week. Buying a house after foreclosure is a confusing subject. There are five reasons for this:
- The rules vary based on the type of mortgage loan you seek (e.g., FHA vs. conventional).
- The rules vary based on the circumstances surrounding the foreclosure (e.g., job loss).
- It partly depends on how quickly you can restore your credit, after the foreclosure.
- There are exceptions to every rule.
- There’s a lot of misinformation online.
I’ll start with the general guidelines for buying a home after foreclosure. Then we can talk about those extenuating circumstances and other variables.
Basic Rules for Buying After Foreclosure
Remember, these guidelines only apply to home buyers who need to use a mortgage loan. If you can afford to pay cash for a home, there is nothing holding you back. Here are the basic rules for buying a house after foreclosure. First, we need to make the distinction between FHA loans and conventional mortgages:
- A conventional mortgage loan is made entirely in the private sector, with no government involvement of any kind. The loan might eventually be sold to a government-sponsored enterprise, such as Freddie Mac. But it is not insured by the government at the point of purchase.
- An FHA home loan is originated by a mortgage lender in the private sector, but it gets insured by the federal government. This program is managed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). These loans are less of a risk for lenders. If the homeowner defaults on the mortgage, the FHA will cover the lender’s losses.
It’s important to understand the distinction between these two financing options. The rules for buying a house after foreclosure are different, depending on the type of mortgage you use.
Generally speaking, Freddie Mac and Fannie Mae have a three-to-five-year rule for getting a mortgage after foreclosure. If there were extenuating circumstances that led to the foreclosure (job loss, illness, etc.), a borrower might qualify for a loan within three years. Without any extenuating circumstances, borrowers may have to wait up to five years.
Here’s a quote that comes directly from the Freddie Mac website:
“If the default was caused by extenuating circumstances, such as job loss or serious illness, then Freddie Mac guidelines state that the borrower must re-establish an acceptable credit reputation for at least the most recent 36 months before applying for a new mortgage.”
Note that this applies to cases when the bank actually forecloses on the home. If a homeowner avoids foreclosure, by doing a short sale or by agreeing to a deed-in-lieu of foreclosure, the waiting period may be as short as two years.
The rules are slightly different for FHA loans. As you will recall, these loans are insured by the federal government with the oversight of HUD. Borrowers could qualify for an FHA loan three years after a foreclosure, if they have restored their credit.
What are Extenuating Circumstances?
When borrowers can document some kind of extenuating circumstances, they could buy a house within three years after a foreclosure. So what are these circumstances? This is where things get a little more cloudy. There is no exact definition of extenuating circumstances, but it generally comes down to one of the following scenarios:
- An unexpected loss of income
- Unexpected costs resulting from injury or illness
- A combination of these things
Buying a house you cannot afford is not an extenuating circumstance. Spending too much money on a wedding or vacation is not an extenuating circumstances. The lender will want to see that you were the victim of some unforeseen tragedy. You lost a job. You had a serious illness that brought huge medical bills. These are the types of scenarios that could have your waiting time reduced.
The lender may require you to document these circumstances in some way. For instance, they might ask for a letter from a hospital to verify medical treatment, or a letter from an HR person to verify the loss of a job. In some cases, they might even accept a written statement from the borrower that explains the hardship.
Rebuilding Your Credit
Another caveat is that you must reestablish good credit. The time-period restriction is a minimum requirement. Borrowers must be qualified for a mortgage in other regards, as well. This includes the borrower’s credit score and debt-to-income ratio.
People who work hard to rebuild their credit might be able to buy a house three years after a foreclosure. On the other hand, a person who continues to have a pattern of delinquencies and late payments may never qualify for a mortgage. You can think of it as “time and good behavior.” Time is important. But future buyers must also change their financial behavior for the better. They must create a pattern of borrowing and repaying their debts on time and in full. This will slowly but surely improve their credit scores.
Debt ratios are also important. In fact, lenders today are much more strict with their debt requirements than they were in the past. Mortgage lenders want to know how much of your income goes toward your debt expenses. This is referred to as your debt-to-income ratio or DTI (learn more).
Disclaimer: This article was based on information available at the time of publication. Mortgage rules and guidelines change over time. So it might be possible to buy a house after foreclosure even sooner than what is mentioned above. This information is presented for educational purposes only. The only way to find out for sure if you can qualify for a mortgage loan is to apply for one. Keep in mind there are exceptions to every rule.