A Guide To Buying a Home After a Foreclosure

Home foreclosures are more common than you might think. In 2020, nearly 215,000 homes were foreclosed on in the United States—the lowest number in more than a decade, according to ATTOM Data Solutions. 

However, the 2020 foreclosure figures were low due to extensive measures enacted as a result of the coronavirus pandemic. These measures included a foreclosure moratorium, loan modifications, and forbearance, which allowed for a pause or reduction in mortgage payments.

Nobody plans on losing their home to foreclosure. However, it does happen, and you’ll still need a place to live afterward. Buying another home after a foreclosure can be a bit more difficult and expensive, but it's possible. Here's what you need to know.

How To Buy a Home After a Foreclosure

If you've lost a home due to foreclosure, you might think you'll never be eligible to buy a home again. But it's not true. Buying a home after a prior foreclosure is possible. It just takes a bit of strategizing.

The first thing to know is that you can choose between many different types of mortgages. Each loan program has its own rules about how long you have to wait after a foreclosure before you're eligible to buy a home again. This time is known as a "waiting period" or "recovery period."

The waiting periods after a foreclosure for the most common loan programs are:

• Fannie Mae and Freddie Mac: Seven years, or three years with extenuating circumstances
• Department of Veterans Affairs (VA) loans: Two years
• Federal Housing Administration (FHA) loans: Three years
• Department of Agriculture (USDA) loans: Three years

After those waiting periods, you may be eligible to apply for a new mortgage. However, you’ll also need to consider other factors. For example, your credit may still be impacted by the prior foreclosure, which can affect whether you're approved for a mortgage.

How a Foreclosure Affects Your Credit

Your foreclosure will stay on your credit report with each of the three credit bureaus for a full seven years. After that, it will drop off, and lenders won't be able to see that you ever went through the foreclosure process.

Even before the foreclosure disappears, its negative impact will decrease with time. How long this process will take depends on your credit score before the foreclosure. According to one FICO study, people who had a credit score of 680 before their foreclosure saw it fully recover after just three years. But people who started with higher scores of 720 and 780 had to wait a full seven years for their credit to bounce back.

This timing means there’s a period when you're technically eligible for a mortgage again, but lenders can still see your foreclosure. For example, if you're a veteran who's interested in a VA loan, you won't be eligible for the first two years after your foreclosure. Between two and seven years, it will still be on your credit report, although it will slowly affect your credit score less and less. After seven years, it will be gone.

Due to the potential impact on your credit score, it can be tricky to buy during that middle time. Here are some things you can do instead:

• Rent a home
• Save up a down payment
• Work on increasing your credit score
• Figure out if you have extenuating circumstances that may allow you to buy a home sooner
• Choose a mortgage with a shorter foreclosure recovery period, such as a VA or an FHA loan

What Are Extenuating Circumstances?

Some types of mortgages, especially conventional loans from Fannie Mae and Freddie Mac, make special allowances for people who could not pay their mortgage due to extenuating circumstances, such as:

• Divorce
• Job loss
• Health care emergency

Keep in mind that lenders will want to be sure you're able to afford your new mortgage payments. If they can see that these circumstances are no longer a financial challenge, they'll be more likely to approve you for a new mortgage.

If an extenuating circumstance applies to you, reach out to your potential lender. You may be eligible for a loan with a shorter waiting period if you're able to document the extenuating circumstances.

The Bottom Line

Your homeownership dreams aren't over if you've lost a prior home to foreclosure. You'll have to deal with a waiting period of two to seven years. While you may be eligible to apply for a mortgage before seven years pass, it may be more expensive. A good mortgage lender can help you figure out your options for purchasing a home after a foreclosure, including how expensive it will be. After that, you'll need to decide if it's something you can afford.

Frequently Asked Questions (FAQs)