Having your property foreclosed can be devastating, not just for the loss of your home but also to your credit score. Foreclosures remain on credit reports for seven years, putting potential lenders on notice that the borrower is high risk. However, some lenders are prepared to take a chance on a previously foreclosed homeowner sooner than others.
Fannie Mae and Freddie Mac
If your mortgage is purchased by Fannie Mae or Freddie Mac, you can expect to wait the full seven years after foreclosure before being approved for a new mortgage loan. According to the National Association of Realtors, even then a borrower is not guaranteed a loan. He must prove that he is no longer a high-risk applicant by reestablishing his credit score. The only exception is if the foreclosure was a result of an "extenuating circumstance" -- a one-time catastrophic event beyond the control of the borrower -- such as divorce, a medical condition or permanent layoff. Fannie Mae and Freddie Mac consider eligible foreclosed borrowers with extenuating circumstances after three years, as long as their loan-to-value ratio is no more than 90 percent.
The Federal Housing Administration (FHA) requires borrowers to wait a minimum of three years after the foreclosure before taking out another mortgage loan. Extenuating circumstances, as in Fannie and Freddie mortgages, might apply to reduce the three-year wait.
Lenders who do not sell their loans to Fannie Mae or Freddie Mac can set their own conditions for lending to previously foreclosed owners. Depending on the perceived risk, such lenders may be prepared to offer immediate funds, typically with significant down payments and comparatively high interest rates. The better the borrower's credit score and assets, the greater his chances of negotiating favorable terms.
Foreclosure can knock over 100 points off a borrower's credit score, so a borrower's chances of obtaining a mortgage in the future turns on his ability to raise that score. The only way to do this is by accumulating positive credit events. This is a slow-burn approach, which requires the borrower to reduce his debt by paying off credit cards and other accounts, and paying rent, bills and taxes on time. After that the borrower can work on improving his score by taking on additional credit in the form of cards and loans, and paying off the full balance each month, to show that he is capable of managing debt.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.