Getting a Mortgage After Foreclosure
Foreclosures are the result of the homeowner defaulting on mortgage payments or taxes imposed by the federal and the state government. The latter is known as a tax lien foreclosure. In the years 2005 and 2006, the real estate market was booming. People were under the misconception that the home prices would continue to escalate and invested in homes despite their inability to make regular mortgage payments. The lenders, for their part, provided sub prime loans to the borrowers who managed to make payments as long as interest rates were low. Once the interest rates started rising, the borrowers defaulted on payments. This in turn resulted in foreclosures.
On September 7, 2008, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) were placed under conservatorship. Fannie and Freddie issued debt securities in the domestic and international capital markets, so that they could provide funds to mortgage lenders.
This was done to ensure that the lenders had sufficient funds to lend at affordable rates. However, the lenders did not comply with the stringent lending requirements and this, in turn, resulted in borrowers defaulting on loans. The reason for placing Fannie Mae and Freddie Mac under conservatorship was because both entities were highly leveraged with leverage ratios of 20:1 and 70:1, respectively. This left them in the position of being unable to handle defaults.
With most sub prime lenders having gone out of business, people can no longer obtain mortgage loans without a good credit score. Since foreclosures stay on record for 7 to 10 years and affect the credit score negatively, getting a mortgage after foreclosure will be a daunting task. It’s better if hard money lenders are avoided since the rate of interest on hard money loans will be very high and may plunge the borrower into further debts. Hence, Fannie, Freddie, FHA (Federal Housing Administration), and VA (Veterans Affairs) are the best bet.
How to Get a Mortgage After Foreclosure
Conventional Loans: Conventional loans can be conforming or non-conforming. Conforming loans are provided in accordance with the guidelines laid down by Fannie Mae and Freddie Mac. Non-conforming loan providers may not adhere to these guidelines. As per Fannie Mae and Freddie Mac guidelines, the borrower needs to wait for 5 years after completion of foreclosure to avail a new mortgage, subject to establishing the desired credit score.
A minimum FICO score of 680 is required and the borrower has to pay 25 percent of the purchase price of the home as down payment, failing which private mortgage insurance becomes necessary. In case of short sales, the waiting period is 2 years. Here, short sales refer to selling the house at a price that does not cover the balance owed on a loan (for which the home is the collateral). In case of extenuating circumstances, the waiting period may be less than 5 years.
FHA Insured Loans: FHA insured loans are government-insured mortgages. The government agrees to make payments if the homeowner stops making them. This insurance, which protects the lender from loss in the event of default, is a substitute for PMI. PMI is a must if the amount of down payment is less than 20 percent. In the case of FHA insured loans, the borrower needs to wait for 3 years, after completion of a foreclosure sale, to get a new mortgage subject to establishing the desired credit score.
A minimum credit score of 580 is required to qualify for an FHA insured loan. In order to qualify for an FHA insured loan, the borrower’s income, assets, and debts have to be fully documented. The house needs to be physically inspected and should meet the desired standards.
VA Insured Loans: Home loans guaranteed by the Department of Veterans Affairs (VA) are similar to FHA loans, with the exception that they are meant for veterans whose eligibility is based on the number of days of active duty and other service requirements. For the purpose of getting a mortgage after foreclosure, a 2-year waiting period is mandatory.
In the case of extenuating circumstances, as determined by the Department of Veterans Affairs, the waiting period may be reduced. For VA guaranteed loans, no down payment is required and no premiums have to be paid for insurance. However, 2 percent of the number of loans has to be paid as a funding fee.
Working on improving the credit score, avoiding credit card debt, making a budget, and spending accordingly will help people re-establish a good credit score and make them eligible for a mortgage loan in time, despite having a foreclosure on their credit report.
