If you’ve gone through a foreclosure than you know how hard the process is and how difficult it can be to recover from. Your finances fall to pieces, your credit ends up in shambles, and you become a renter for however many years it takes you to recover. FHA foreclosures are not pretty when it comes to your finances. That being said, the Federal Housing Administration does make it possible for you to purchase a new home after you’ve gone through foreclosure and even after you’ve gone bankrupt. There are requirements of course, but they are not so strict that you can’t meet them.
Guidelines: What it takes to Purchase after a Foreclosure
FHA foreclosures occur because the agreements made when the loan is acquired are not kept. Mortgage payments stop coming in, the loan goes into default, and eventually the process to take back the home is started. The lender loses money on the loan, so the Federal Housing Administration pays the lender through the federal program and takes control of the home. To make back the money, the home is resold on the market. You can find homes that are FHA foreclosures on the HUD website*.
After you’ve gone through a foreclosure and your home has become a HUD home, your financial state is in a place where no lender will look at it. You have become too high risk for any of them to consider. Until this is fixed, you won’t be able to qualify for a loan. This is the case whether you go through a traditional lender or through a federal program. FHA foreclosures, like any other foreclosure, take some time to recover from. In the case of a foreclosure time is your best asset. Typical guidelines for approval on a loan require that you wait at least three years from the completion of the foreclosure. Those three years can be your best friend if you utilize them. During this time you are going to want to start to rebuild your credit and reestablish yourself as a responsible homeowner. You will need to stay with your current employer or, if you switch jobs, you will have to be with that employer for two years before you will be considered for qualification. Start making regular monthly payments on your bills and keep up with them. It’s best not to miss these payments. You’ll need your history to show that you are reliable. If you have too many missed payments over the course of a year, you’ll reduce your chances of approval.
So in a nutshell, this is what you need to do before you’ll be considered for approval:
- Three years wait from the completion of the foreclosure
- Two year work history with the same employer
- Proof that you have taken steps to rebuild your credit and financial history
- Proof that you have been reliable in making regular monthly payments.
Once you are able to apply for the loan, your lender and real estate agent will help you determine what, if any, additional requirements need to be met for approval.
Exceptions to the Rule
In the past, when a home was foreclosed on it was automatically assumed that the homeowner had been irresponsible with his finances and could not be trusted to make the payments on a new mortgage for a long period of time. This is the reason for the three year wait; you have to show that you can and will make the payments. But with the economic downturn that hit the real estate market, the Federal Housing Administration revisited those requirements and made one significant change. They adjusted the wait period. Now, it is possible to get a loan after a foreclosure after only a year, as long as the first foreclosure occurred due to financial situations beyond your control. So if you lost your job, were laid off, or you were on commission and your income dropped due to the economy, lenders may consider you a good candidate for a loan. You will have to show proof that your income dropped 20% and stayed that low for at least six months. You have to prove that you have worked to rebuild your credit, and that your finances are stable so you’ll be able to make the payment. In addition, you will need to complete housing counseling.
Getting into a home after a foreclosure isn’t impossible, but it will take some time to become reestablished as a good candidate. Repairing your credit, rebuilding your financial history, and approaching potential lenders with proof that you are reliable with your finances will be your key to getting your foot in the door.