Certainly one of the worst things that can happen to someone’s credit profile is a foreclosure. Lenders go through great lengths to avoid a foreclosure as they’re expensive, time consuming and practically no fun for anyone involved. Borrowers don’t buy homes with the intent to default nor do lenders approve loans hoping they’ll have to take the home away. All in all, it’s a lose-lose situation. But it doesn’t have to be a “forever” situation. In fact, surprisingly, once credit has been reestablished there are options for borrowers who want to buy a home even though there is a recent foreclosure.
Conventional loans, those underwritten to Fannie Mae and Freddie Mac standards do ask that you wait seven years from the sale date of the foreclosure. That’s a long time for most but there are other alternatives for those who want to buy now while rates are still low and before prices go up even further than they already have.
If you’re VA eligible, you can apply for a VA loan just after two years have passed. That’s way shorter than the conventional waiting period and the VA loan limits in California accommodate most borrowers. FHA loans ask that three years pass before being eligible for an FHA loan. USDA loans, the third of the three government-backed loans also need a three year waiting period.
Yet in every instance, credit needs to be reestablished and many lenders ask that at least three trade lines appear on a credit report showing no payments made more than 30 days past the due dates. With just one such late payment showing since the foreclosure, it will be difficult to qualify. It’s also very important to keep track of your rental history and continue to make timely payments each month for your housing.
You will also be asked to document the reason for the foreclosure such as a loss of job, a divorce or an extended illness. The lender will simply want to know the foreclosure was beyond your control and you made every attempt to keep the home. Lenders are forgiving if borrowers can show that whatever caused the initial foreclosure has been fixed and not repeatable. But the reestablished credit profile can’t be emphasized enough—keep the credit clean with at least three trade lines and you’ll be fine.