No one ever plans to go into foreclosure when they purchase their home. But when unexpected financial troubles lead to foreclosure, most homeowners wonder if they will ever be able to own a home again.
The good news is that foreclosure is not a real estate death sentence. It’s true that conventional loans generally require a seven years to pass after a foreclosure before a homeowner can buy again. But, there are many ways you can prepare to buy your next home as you rebuild your credit. And many times, you can buy again sooner than you think.
FHA Loans Generally Require a Three-year Period After Foreclosure
FHA loans are attractive to buyers because their low down payment requirement of 3.5% makes the dream of owning a home more realistic for many people. You can apply for an FHA loan once three years have passed after a foreclosure judgment. Three years is a great amount of time to rebuild your credit score and save up funds for a down payment.
There are limited exceptions to the three year waiting period for an FHA loan. If you can prove that you had extenuating circumstances like a job loss or significant pay reduction, a loan may be available to you after just one year.
Special Loans Allow Buying Again Sooner
If you want to own a home again, you have other options. Here are a few of the loans that might work if you have a previous foreclosure judgment:
- Jumbo loan–These loans are available immediately, if you still have a fairly large amount of cash after your foreclosure. These loans are available for homes ranging in price from $350,000 up to 5 million. A jumbo loan requires at least 10% down, and also 20% available in pledged assets or cross-collateralization. If you don’t have those assets available, you need to put down even more. A credit score of around 620 or higher is required as well. The rates will be higher than with other loans.
- Portfolio Loan–These loans are also available immediately after a foreclosure. For these loans, a buyer needs a minimum of 20% down, a credit score of at least 620, and proof of the ability to repay by providing bank statements and tax returns.
- VA Loan–VA loans are available to veterans who have served in the U.S. Armed Forces. VA loans have a waiting period of 2 years after foreclosure, which is one year sooner than you can buy again with an FHA loan.
- Other special loan products–Some lenders will offer loans to buyers who have had recent foreclosures. However, proceed with extreme caution: these loans often have very high rates and unfavorable terms. Talk to your lender about whether there are any special loans available.
Rebuild Your Credit
Since it is likely that you will have to wait some amount of time before you buy again, use this time to rebuild your credit. You can do this by maintaining a responsible budget and using the credit you have to build up good payment history. You may also consider a credit counseling service, but make sure they are reputable.