Buying a House after Foreclosure

Buying a house after foreclosure can be a daunting and difficult task. Foreclosure leaves financial and psychic scars on homeowners, which can create a skittish future buyer. Prospective homeowners interested in re-entering the market should consider every aspect of their financial situation before attempting another home purchase. From the credit score to down payments; foreclosure changes the playing field for the future buyer.

Waiting for the Right Time

Because foreclosure damages your credit, it will be nearly impossible to borrow money from a qualified lender for up to seven or eight years. Foreclosure tarnishes the borrower’s credit report, which is a high priority to lenders, especially in this rigid lending environment.  

The borrower's credit score ranks high on the lender's list because this data is the best indicator whether the borrower can repay the loan or not. Factors that contribute to the score include how much money the borrower has in the bank, employment history and payment history.

Some Wiggle Room

Since banks make hefty income from interest derived from loans or by selling them on the secondary market; some financial institutions may be willing to take a chance on some borrowers if other areas of the borrower’s credit and history to tell a more complete story.

For example, if the borrower was underwater in his or her home and had to walk away due to elements beyond their control (such as job loss or divorce); the bank may look deeper into the application. The lender will want to know if this is the borrower’s first foreclosure, the reason for the foreclosure and their complete financial situation including assets, liabilities and income.

The lender may consider extending a loan to the borrower, however this loan may have additional conditions. Instead of the traditional 20% down payment, the lender may require a 30% (or possibly more) to secure the loan. A higher down payment would provide the lender with enough collateral should the borrower hit hard times again and walk away.

Government Programs

Conventional Fannie Mae loans may elude the buyer who experienced foreclosure once upon a time, but other government sponsored programs may be the answer. The Federal Housing Administration (FHA) offers programs that allow borrowers with a foreclosure on their record to pursue lending after a three year wait time post foreclosure.

Down payment requirements are only 3.5% and 100% financing options are available. An extensive employment record is not mandatory and the program has a higher debt ratio than required for other loan programs. FHA loans are a viable option for not only single family homes, but also duplexes, condos and multiplex homes.  

Examples of FHA type loans include:

  • Fixed and adjustable rate—Both 15 and 30 year
  • Buydown FHA loans—15 or 30 year product that allows buyer to obtain lower initial payments for a higher priced home
  • HUD homes—financing for as little as $100 down
  • Officer and teacher next door—50% discount on appraised value for teachers or law enforcement officers

Although foreclosure has a devastating impact on homeowners; you can get back on your feet and into a home with the right strategy and loan program.

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