Default Mortgage 101 - Buying a Home after Foreclosure Best Tips

Nov 11, 2023 By Susan Kelly

While you may have thought you would pay your mortgage payments on time and regularly, you never know what the future may hold. So, if you are in financial distress, which causes you to lose your home due to foreclosure, don’t worry. You can get back on your feet and buy another home.

It isn’t an easy process to bounce back to buying a home after foreclosure, but all you need is a reasonable amount of time and financial planning. Is there anything else you need to know? Yes, and let's find out.

What You Need to Know When Buying a Home After Foreclosure

Before we go into details of this article, here are some key notes that you should be aware of.

  • The mark of default or foreclosure will stick with you for at least seven years before it is automatically removed.
  • Credit rebuilding is your best friend, so pay whatever debt you have on time and minimize your credit utilization.
  • Based on different factors, it may take 2-3 years before you can start applying for a new loan.
  • Most interest rates are higher after default or foreclosure, and you need to improve your credit score before you will be getting good deals.

What's the Minimum Duration for Buying a Home After Foreclosure?

The minimum duration varies between different loan types and is at the discretion of the lenders. The duration may be reduced depending on the situation that led to the foreclosure. Let's discuss each of these cases one by one.

Conventional Loans

The duration is quite lengthy for this one, which can be as much as seven years, which is a long time. But it does have its levies, which depend on the condition behind the foreclosure. If you lost a job or have had a medical condition that was the primary cause of unpaid mortgage payments, the situation can help reduce this period to as low as three years.

FHA Loans

The Federal Housing Authority will consider the sale of the foreclosure home that was in your name. In some cases, the duration that you have to wait before buying again with the loan can also start after the foreclosure proceeding has started. Please consult with your agent and get to know more about it from them, as generally, they have you wait for around three years.

Same as with conventional loans, under special circumstances, the duration can be reduced.

VA Loans

The loans you get from the Veteran’s Affair usually attach a home loan entitlement with you. What it means is that the VA now gives you a guarantee to pay the lending party if you have difficulty meeting the deadlines. Even though buying a home after foreclosure, you have to wait two years because of the entitlement, and you get off easy.

USDA Loans

Their duration is also three years before you can reapply for a loan after your foreclosure, but if you live in a rural areas, you can quickly get it. Your credit history can also have bearings on your duration.

Non-qualified Mortgage

In these types of loans, you can immediately get a new loan after foreclosure. But the thing is that these loans haven't yet met the government's standard, causing them to charge you a massive sum for new applications. In the long run, it is better to go with other loans and supports to save you thousands of dollars in interest rates.

How Will Any Foreclosure Impact My Credit History?

On average, a foreclosure on a mortgage can drop your credit score by at least 120, which can take several years to go back to normal. Foreclosure reports are maintained for a long time, and that's why government and federal agencies, along with banks, don't go for foreclosure. Instead, they provide defaulters with different schemes to avoid that.

In some cases, due to errors in reporting, the improvement in your credit score isn't represented in reports. While it is automatically done, in case of an error, you should contact credit reporting institutions and correct the error. Sometimes, without knowing, any application can be rejected because of it.

Best Tips and Tricks to Buying a Home After Foreclosure

  1. Reviewing Credit Reports – You can't remove the foreclosure report so that you can check the reports are correct and start improving your credit score. Report if there is any error.
  2. Rebuilding Your Credit – Don't delay any payments from now on, and maintain a really low utilization of your credit. You can also start only using a secure credit card and don’t make new applications till it improves.
  3. Improve Your Income – Start saving money to pay off some debt and ensure your job or business makes money consistently. Prolonged work history with stable pay boosts your credit score a lot.
  4. Patience and Research – You need to stay patient for a while, in the meantime, searching for support programs to ease your debt. Paying off your defaulted debt is the most crucial aspect.
  5. Ready to Apply – Before applying for any home finance loan, always save enough money for down payments. This time around, you will need to get a better deal if you clear your down payment first.

Final Words

You don't default out of fun or racking some cash for a big purchase; sometimes, it is just bad luck. There are many scenarios, like the death of a spouse or natural disaster, where things aren't in your control anymore. When that happens, it is best to consult with your investment advisor and look for better solutions.

In this article, we share some quick information that will be helpful for you on your journey to buying a house after foreclosure.

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