By Updated June 30, 2017
It is unlikely that you will get a mortgage loan within two years of a foreclosure, since the minimum seasoning, or wait period, is three years. Federal Housing Administration lenders might reduce the wait period to two years if you can show that the foreclosure was caused by a one-time, uncontrollable event. Getting a VA loan after two years depends on any remaining entitlement you have.
Wait Three Years With the FHA
Borrowers are not eligible for an FHA-backed loan until three years after the foreclosure case ended, which is usually the date the prior home was sold. FHA lenders might consider your loan application sooner if you can show that the foreclosure was caused by “extenuating circumstances.” These are events that were beyond your control, such as the serious illness or death of a wage earner. The FHA does not consider the inability to sell your property due to job relocation to be an extenuating circumstance, and divorce will only qualify in very limited situations.
Wait Two Years After Defaulting on a VA Loan
If you are eligible for a Veterans Affairs home loan, you’ll need to wait two years after the foreclosure before making your application. The more pressing question is what happens to your entitlement after you foreclose on a VA loan. Generally, the VA entitlement you used when you took out your previous VA mortgage remains attached to the foreclosed VA property until the loan is repaid in full. Essentially, you have lost a chunk of your entitlement in the foreclosure. It’s a good idea to get a copy of your Certificate of Entitlement to see if you have enough entitlement left to qualify for another VA loan.
Seven-Year Wait for Conventional Loans
Conventional loans insured by Fannie Mae or Freddie Mac have a seven-year seasoning period. This means that you must wait for seven years after the foreclosure before applying for a conforming loan. You might be eligible after three years if you can show extenuating circumstances, and the maximum loan-to-value ratio of the new mortgage – how much you borrow in relation to how much the property is worth – is no higher than 90 percent. According to Fannie Mae, an extenuating circumstance is a one-time event, beyond your control, that resulted in a sudden, prolonged or significant reduction in your total income. This is a different definition from that used by the FHA, and it might include financial hardship situations such as divorce.
Proving Extenuating Circumstances
Whenever you’re seeking a reduction of the seasoning period, you’ll need to write a letter supporting the claim of extenuating circumstances. The letter must fully explain the nature of the event that led to the foreclosure and show that you had no reasonable option other than to default on your mortgage payments. Valid evidence to support your claims can be things like divorce decrees, copies of medical bills or severance papers.
Improving Your Chances of Getting a New Mortgage
Even with extenuating circumstances, you’ll need to re-establish good credit following the foreclosure. For example, the FHA’s loan with a 3.5 percent down payment requires a minimum credit score of 580; if your score is lower than 500, you likely will not qualify for a loan at all. Foreclosures can knock 100 points or more off your credit score, and this undoubtedly will affect the availability of mortgages and the interest rate that you receive. To re-establish good credit, it’s important to maintain a small number of credit accounts, keep the account balances low and consistently pay your bills on time. Taking proactive steps to improve your credit should help your score to rebound in as little as two years.