Let’s Talk. Believe it or not, there is life after foreclosure. There are ways to pick up the financial pieces, sort through them and, even without the help of all the king’s horses and all the king’s men, put them back together again.
To obtain a new mortgage with a foreclosure on your credit record is challenging, and most lenders have a waiting period. This period varies, depending on whether the loan is conventional or government-insured. FHA is typically a bit more lenient with homeowners who have been through foreclosure.
The waiting period for a new FHA loan is typically three years unless you can prove to the lender that the foreclosure occurred through no fault of your own. In this case, the waiting period is reduced to only one year, in HUD’s Back to Work Extenuating Circumstance program.
You’ll need to prove that the factors leading up to the foreclosure reduced your income by 20 percent or more for at least six months. If you were fired or quit your job, you won’t qualify for this program.
The Department of Housing and Urban Development wants to see “full recovery” from the event that caused the foreclosure, so during the waiting period you’ll need to keep up with rent and bill payments. You’ll also be required to attend a housing counseling session 30 days before you apply for the loan.
Fannie Mae and Freddie Mac require applicants with foreclosures on their records to wait seven years. They, too, have an extenuating circumstance program, but it is longer than FHA’s – three years.
The requirements are steep, however. To obtain this financing, the applicant must:
- Have enough money to meet six months of loan payments on reserve in the bank.
- Take out a loan for $100,000 or more.
- Make a 25 percent down payment.
- Have a FICO score of at least 600.
Become Less of a Risk
Even folks who haven’t gone through foreclosure may be considered a risk to a lender. Poor credit is usually the culprit, so spend the waiting period fixing your credit. Build a history of timely repayment, and never miss a payment.
Once you are out from under your unmanageable house payments it’s tempting to spend that extra money on big-ticket items. Tempting, but foolish. Taking on new debt throws your debt-to-income ratio (DTI) out of whack, and lenders may consider you too risky to lend to.
Lenders use two numbers in the ratio – what they call the front-end and the back-end, and they typically look for a 33/38 for a conventional loan, 29/41 for FHA-backed loans, and no front ratio but a back ratio of 41 for a VA-insured mortgage, according to Terry Light of RealEstateABC.com.
In other words, if you are pursuing a conventional loan, the lender will want to make sure that the payments on the home you want to purchase won’t take up more than 33 percent of your after-tax income. Also, when your consumer debt is added to those payments, the result shouldn’t exceed 38 percent of your income.
As you can see, taking on revolving credit debt, or taking out additional loans, will skew your DTI and make you appear to be a credit risk to the lender.
Save Your Money
Gone are the days of the no-down, no-doc loans that got the mortgage industry into hot water. Today, you are required to make a down payment on a home unless you are using a VA-backed loan or getting a loan for low-income applicants through the U.S. Department of Agriculture Rural Development program.
FHA’s lowest down payment is 3.5 percent of the loan amount. With a conventional loan you’ll be required to come up with at least 20 percent.
See a Lender for Pre-approval
This is typically the first step in the home-buying process. For those coming out of foreclosure, it occurs when all your ducks are in a row:
- You’ve waited the appropriate amount of time.
- You’ve cleaned up your credit.
- You’ve saved the down payment money.
Once the lender gives you pre-approval, it’s time to get in touch with the Select Homes Team at Keller Williams Realty Capital District. The Waiting is over and so you;ll be a homeowner again.
Have a great day!
Tim Mulchy – 518-857-7653