It’s already been a decade since the start of the Great Recession, and many former homeowners sidelined by foreclosure are ready to jump back in the market. If you’re one of them, first of all, hooray! Secondly, we’ve listed a few good first steps to help you navigate the process of buying after foreclosure. We hope they help you on your journey back to homeownership.
Review foreclosure waiting periods
No matter how well you’ve reorganized your finances and reestablished credit, you will probably have a waiting period before you can arrange new financing. However, that waiting period varies depending on the type of loan (it may also vary depending on the type of debt crisis experienced, which can include foreclosure, bankruptcy and short sale). Lenders issuing FHA loans, for example, may be more forgiving of past credit difficulties because they’re backed by the federal government. Less risk for the lender = more opportunity for you.
| Loan option | Foreclosure Waiting Period |
|---|---|
| FHA | 3 years |
| Conventional | 7 years |
| VA | 2 years |
| USDA | 3 years |
Program and lender guidelines vary and other requirements, such as loan limits, loan-to-value ratio, minimum credit scores and occupancy may apply and are subject to change without notice. Certain bankruptcies may require court approval for new debts. Waiting periods begin on the date of most recent bankruptcy discharge or dismissal, or on completion of foreclosure action or short sale/deed-in-lieu transaction.
Check your credit reports
After reviewing foreclosure waiting periods, you’ll want to check your credit reports to make sure there aren’t any snags you weren’t aware of. Don’t assume you know what’s there. Look for inaccuracies, such as accounts you didn’t open, debts you’ve paid off, misspellings and other errors. Get a separate report from all three major credit bureaus because they collect information separately and may contain different errors. By law, you’re entitled to a free report from each of these bureaus annually. To request your credit report, go to www.annualcreditreport.com.
If you discover your credit needs a tune-up, check out 5 Ways to Help Maintain (or Improve) Your Credit Score.
Set your budget and pre-qualify
Before going any further, it’s important to determine how much you’re able to comfortably spend each month so that you don’t end up in the same situation twice (see: How Much Mortgage Can I Afford). A general guideline is to spend approximately 28% to 31% of your gross income on housing costs. Also keep in mind that your estimated monthly payment will vary depending on your loan type and terms.
Once you’ve set a budget, you can pre-qualify to get a ballpark figure of how much money a lender would be willing to approve for a mortgage. Note that this isn’t an actual loan application, rather a quick overview and discussion of your financials. Once you have a lender’s estimate, you’ll have a much clearer idea of what price point to target in your home search.
Visit our affiliate lender HomeAmericanMortgage.com or call 866.400.7126 to learn more about mortgage pre-qualification.
For more on buying a home after foreclosure, check out our free download: Buying a House After Bankruptcy, Foreclosure or Short Sale