There are many misconceptions about how long you have to wait after a home foreclosure to be able to buy and finance a home. You may have heard that you have to wait 7 years. Some people even believe that they can just about give up on ever buying another home.
As with most misconceptions in the law, these ideas are floating around for two main reasons. First, there’s usually some truth that gets twisted or blown out of proportion. Second, the area of law at issue is complicated so that it’s understandable that people get confused and misapply that truth to where it doesn’t apply.
So, yes, under certain circumstances people cannot qualify for another mortgage for an extended period of time after going through a foreclosure. Speaking very generally, with conventional financing it’s difficult to get a home mortgage until 7 years have passed. But the reality is that for people with credit challenges there is an alternative to conventional financing, FHA (Federal Housing Administration) insured mortgages.
WHAT’S THE FHA AND HOW CAN IT HELP YOU?
The FHA is an agency within the federal Department of Housing and Urban Development (HUD). Part of its mission is to enable lenders to finance home loans for those with moderate income and/or credit challenges. The FHA does this by guaranteeing to repay the lender if you do not pay the mortgage. This gives lenders the confidence to provide mortgage financing to those it would otherwise consider too risky.
FHA-insured mortgages have less rigid qualifying requirements than conventional mortgages, allowing you to qualify for a new mortgage much sooner after you either lost your home to foreclosure, filed a bankruptcy case, or both.
AFTER A FORECLOSURE
Generally you have to wait only 3 years after a home foreclosure before you are eligible for a new FHA-insured mortgage. This applies not just to the prior foreclosure of your principal residence, but also that of a residence that you owned and were renting out, or any other kind of investment or business real estate.
This 3-year rule also applies if you gave back any of these kinds of real estate through a deed-in-lieu of foreclosure, in which you surrender title to your home or other real estate to avoid a foreclosure.
But sometimes you can qualify in less than 3 years.
WHEN DO YOU NOT HAVE TO WAIT 3 YEARS?
As the HUD Handbook 4155.1 on home loans puts it, the “lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner.” See the Borrower Credit Analysis Section of the HUD Handbook 4155.1 at Chapter 4, section C.2.f.
Lenders have a fair amount of latitude in deciding whether there were valid “extenuating circumstances” beyond your control.
HUD rules give some guidance on what is a valid excuse for getting around the 3-year rule.
Getting divorced is not considered an extenuating circumstance, with one stated possible exception: “where a borrower’s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed.”
Another situation that does not count as “extenuating circumstances” is if you were unable to sell the property “due to a job transfer or relocation to another area.”
HOW TO PRESENT THE “EXTENUATING CIRCUMSTANCES”
Put together a letter or memo of explanation about your foreclosure and the circumstances that caused it. Describe the job loss or other reduction in income, whatever appropriate unpreventable increases in expenses you experienced, and/or any other events that caused your inability to pay your mortgage. Put effort into this, making it thorough enough to be compelling, including as many unavoidable causes of your financial hardships as apply. But be as brief as possible, knowing that whoever is going to read it will have limited time and patience.
Also include the changes you have made since the foreclosure to improve your financial situation. Show that your foreclosure is not a reflection of your unwillingness to pay your debts. Show whatever you can to demonstrate that you have turned your financial life around, that the lender should now consider you a good credit risk. Demonstrate that you’ve recovered from the hardship and that the foreclosure was a essentially an isolated event.
DO YOU NEED TO HAVE GOOD CREDIT OTHER THAN THE FORECLOSURE?
Yes, whether you have “extenuating circumstances” for shortening the time to less than three years, or instead you’re trying to qualify after the 3 years are up, you need to show that you’ve re-established good credit AFTER the foreclosure.
You should begin to rebuild your credit immediately after foreclosure by:
- paying all of your bills and expenses on time
- monitoring your credit periodically for changes and inaccuracies
- making sure that your foreclosed mortgage balance gets zeroed-out
- repaying any deficiency balance you may owe, and
- applying for different types of credit in a sensible way
If there were any credit problems after the foreclosure, such as late payments, lawsuits, judgments, or any other collections after a foreclosure, provide an explanation. You may not qualify for an FHA loan if credit mismanagement occurs after the foreclosure or for reasons unrelated to it. Because lenders can use a certain amount of their own discretion to determine whether you are capable of paying the mortgage, give them reason to believe you are.
So, getting another mortgage after going through a foreclosure is possible if you plan it well. The FHA and its approved lenders can be relatively forgiving, allowing you to qualify way sooner than with conventional lenders and with lower credit-score requirements. Essentially, FHA-approved lenders need strong evidence that the financial hardship you experienced before won’t happen again. If so, you can qualify to buy a home again quite quickly.
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Orange County and Riverside bankruptcy attorney Norma Duenas has represented more than 3,000 individuals and couples in filing for Chapter 7 and Chapter 13 bankruptcy. Her focus is on ensuring that clients understand how bankruptcy works and whether it is the right option for their unique financial circumstances.
Attorney Duenas’ approach is to present those taking advantage of a FREE consultation the best possible options available to resolve their financial problems — including possible eviction — and to help them rebuild their financial future. Ms. Duenas is a member of the National Association of Consumer Bankruptcy Attorneys and has an Excellent rating among clients on Avvo.com. Her law office is also part of the Better Business Bureau and has an A rating.