Borrowers who have difficulty getting conventional mortgages flock to Federal Housing Administration loans because of the flexible qualifying criteria. The FHA insures loans funded by approved lenders, promising to reimburse them if a loan goes bad. The FHA allows you to get a loan after a foreclosure trustee sale. You must wait at least three years and during this seasoning period, reestablish good credit, recover from financial hardship and meet the FHA's income and employment guidelines. Compensating factors, which reassure the lender that you can make the new payments, also help you to qualify for an FHA home loan after a trustee sale.
Improve your financial situation. Because income and job loss is a common cause of foreclosure, financial recovery after a trustee sale often involves improving your employment prospects. Use job training and placement programs offered by local and federal resources to help you learn new skills and increase your earnings, recommends the Federal Reserve Banks of San Francisco and Atlanta. For example, the Department of Labor provide specifics on unemployment benefits, training and referral programs at the national, state and local levels. The FHA requires at least two years' worth of stable employment and income to qualify for a loan.
Re-establish your credit score and maintain all other accounts in good standing. The extent of a foreclosure's impact on your score depends on your credit before the mortgage default, according to CNN Money. For example, a borrower with a score of 780 stands to lose more points, up to 160, compared to a borrower with a 680. You can recover more easily -- within about two years -- by keeping the foreclosure an isolated event and meeting all other obligations, MyFICO says. The FHA allows borrowers with as low as a 500 to qualify with a 10 percent down payment; however, most lenders require at least a 640 score due to more strict lender-imposed guidelines known as overlays.
Accumulate the necessary down payment funds or reserves. The FHA requires a minimum down payment of 3.5 percent. It allows borrowers to receive gift funds from a family member to cover all or part of the down payment, in which case, you can still benefit from having reserves. Because borrowers with a previous foreclosure present a higher risk of default, the FHA lender will want to see compensating factors. For example, a down payment of 10 percent or more, accumulated savings and conservative spending habits are compensating factors that a lender can document to justify your loan approval.
- HUD: Handbook 4155.1
- US Legal: Trustee Sale
- MyFICO: How Long Will a Foreclosure Affect My FICO Score?
- CNN Money: How Foreclosure Impacts Your Credit Score
- Yahoo Finance: How Lender Overlays Prevent Mortgages
- Federal Reserve Banks of San Francisco and Atlanta: A Resource Guide for Foreclosure Recovery
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.