Many people who have gone through foreclosure wonder if they will ever able to buy a house again. While your credit will take a big hit after foreclosure, you might be able to get another mortgage after some time passes.

The amount of time you have to wait before applying for a new mortgage loan depends on the type of lender and your financial circumstances.

Lenders don’t like to see a foreclosure on your credit report. But, there may be some hope if you’ve demonstrated a rehabilitated life situation and have had perfect credit since the foreclosure.

The lender is looking for proof the circumstances that caused the foreclosure are well behind you and are not likely to be repeated. For example, if you had a medical emergency, incurred high hospital bills and missed work, but you are now recovered, then there’s a good chance you could be approved. But, if you had gambling problems and you’re still regularly visiting the casino, you won’t be approved.

In general, underwriters are looking to confirm:

• You had great credit before the foreclosure
• You have had great credit since the foreclosure
• The foreclosure was caused by a one-time event
• You are now recovered or have made fundamental changes in your life since the event that caused the foreclosure

Let’s get into it.

• What is the Waiting Period for FHA Loan after Foreclosure?
• What is the FHA Waiting Period?
• FHA Waiting Period after Chapter 7 Bankruptcy
• FHA Waiting Period after Chapter 13 Bankruptcy
• Can you get Another FHA loan after Foreclosure?
• Can I get a Mortgage 2 years after Foreclosure?
• How long does Foreclosure Show on Credit?
• How can I Rebuild my Credit?
• What is the Downside of an FHA Loan?
• Can you have 2 FHA Loans at once?

What is the Waiting Period for FHA Loan after Foreclosure?

If you have gone through a foreclosure, you might qualify for a new FHA mortgage loan after waiting three years. After a Chapter 7 bankruptcy, the waiting period is generally two years. If you file for Chapter 13 bankruptcy, you might be able to get a new FHA mortgage before you complete the plan.

Read Also: Maximum FHA Loan Amount

The Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD), insures lenders against some of the risk involved in lending to borrowers who often don’t qualify for conventional home loans, including first-time homebuyers or those with low or moderate incomes. The loan itself comes from your lender, not the FHA.

Getting an FHA Loan After a Foreclosure

To qualify for an FHA mortgage loan, you usually have to wait at least three years after the foreclosure.

Getting an FHA Loan After a Chapter 7 Bankruptcy Discharge

In most cases (but not all), you have to wait two years from the date of your Chapter 7 bankruptcy discharge before you’ll qualify for this kind of mortgage loan. Keep in mind that a discharge date isn’t the same as the filing date. In most cases, you’ll receive your discharge paperwork just before your case closes.

At times, people file for bankruptcy due to no fault of their own. If you fit into this category and can show that filing for bankruptcy was beyond your control, you might be able to reduce the waiting period to twelve months. Additionally, you’ll need to show that you’ve handled your financial affairs responsibly after the bankruptcy.

Getting an FHA Loan After You’ve Filed for Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy is a long three- to five-year process—but that doesn’t mean that you can’t buy a house during that time. You can obtain an FHA loan before you complete your plan if you meet the following conditions:

• You’ve paid 12 months of plan payments.
• The court approves your request to purchase a house with an FHA loan.

The 3 year waiting period can be waived!

According to the FHA:

“The Mortgagee (lender) may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the foreclosure”.

Divorce

The FHA does not consider a divorce as an extenuating circumstance, although, an exception can be granted where the borrowers mortgage loan was up-to-date at the time of the borrower’s divorce when the ex-spouse received the property, and the mortgage was later foreclosed.

Short Sale

Short sales are title transfers when the proceeds are less than the amount owed on the home and the lien holders agree to release their liens and forgive the deficiency balance on the real estate.

Borrowers who engaged in a short sale are generally not eligible for a new FHA-insured Mortgage if they relinquished a home through a short sale within three years from the date of new FHA case number assignment.

Exception for Borrower Current at the Time of Short Sale

A Borrower is considered eligible for a new FHA-insured Mortgage if, from the date of case number assignment for the new Mortgage:

all Mortgage Payments on the prior mortgage were made within the month due for the 12-month period preceding the Short Sale; and installment debt payments for the same time period were also made within the month due.

What is the FHA Waiting Period?

FHA Lenders come into contact with borrowers every day who have at one point filed for bankruptcy. Although FHA loans are easier to qualify for, the FHA guidelines do not allow borrowers to apply for an FHA loan too soon after a bankruptcy has been discharged.

Millions of Americans file for bankruptcy every year. Nearly half of those bankruptcies are due to medical-related debts. The bankruptcy statistics also indicate that most of the individuals who file for bankruptcy are under the age of 30 and are on the lower-income scale.

Many people also get bad advice when it comes to filing for bankruptcy. In most instances, it will limit their ability to get a mortgage. Then, they will have to go through a bankruptcy seasoning period or waiting period before they can apply for a mortgage again.

You can apply for an FHA loan just 2 years after a chapter 7 bankruptcy and 12 months after a chapter 13 discharge if you have made at least 12 on-time bankruptcy payments and have written permission from the bankruptcy court to enter into a new mortgage transaction.

The FHA guidelines indicate that the FHA bankruptcy waiting period is 1 to 2 years after the bankruptcy discharge date depending upon the type of bankruptcy. However, an exception can be granted to reduce that waiting period to just 1 year.

The waiting periods and requirements will depend upon whether you filed a chapter 7 or chapter 13 bankruptcy in addition to some other factors which are detailed below.

FHA Waiting Period after Chapter 7 Bankruptcy

A chapter 7 bankruptcy is when your debt is forgiven but you also may have your property and other assets liquidated to repay the creditors. This type of bankruptcy is usually done to eliminate credit card, auto, medical bills and other small debts. This will not excuse taxes owed, alimony, or child support.

A chapter 7 bankruptcy is typically for individuals whose income levels make it nearly impossible to pay off their debts.

If you filed for a chapter 7 bankruptcy, you can still get an FHA mortgage if you apply (FHA case number is generated) at least two years after the bankruptcy discharge date.

In addition to having two years pass, you must also:

• Establish a good credit standing since the bankruptcy. This means making on time payments.
• Do not incur any new debt

If you filed for a chapter 7 bankruptcy more than a year ago, then it may not be a bad idea to begin discussing your mortgage options even if the two-year mark is just a few months away.

FHA Waiting Period after Chapter 13 Bankruptcy

A chapter 13 bankruptcy is one where you agree to make payments to pay for your debts over time and not forgive them. The bankruptcy court will establish the payment plan to satisfy the debts.

A chapter 13 bankruptcy is usually for those who have a steady income and sufficient to pay off the outstanding debts over time.

According to the HUD Handbook 4000.1, if you filed for a chapter 13 bankruptcy, you can still get an FHA mortgage if you apply (FHA case number is generated) at least 12 months after the bankruptcy discharge date.

In addition to having 12 months pass, you must also:

• You must have been making on time payments since your bankruptcy has been discharged
• You receive written permission from the bankruptcy court to enter into a new mortgage transaction

Exceptions to the FHA Bankruptcy Waiting Period

The FHA guidelines do permit some exceptions to the bankruptcy waiting periods. This exception process falls under the “FHA Back to Work Program” which essentially reduces a chapter 7 waiting period to just one year.

The waiting period could possibly be reduced to just 12 months under the following conditions:

• You can show that the bankruptcy occurred due to reasons beyond your control, or extenuating circumstances
• You have since proven to have been able to be financially responsible during those 12 months
• You must attend mandatory HUD approved counseling

Some examples of extenuating circumstances are as follows:

• Significant loss of income of 20% or more for at least 6 months
• Death of a spouse whose income was a critical factor in making payments
• Serious illnesses
• Natural disasters

These extenuating circumstances must be proven or documented by the lender. The FHA loan application must also be manually underwritten with careful analysis of the borrower’s credit history and performance since the bankruptcy was discharged.

The FHA Back to Work Program also helps borrowers with these other credit events:

• Foreclosures
• Loan Modifications
• Short Sales
• Deed in lieu
• Pre-foreclosure sales

Can you get Another FHA loan after Foreclosure?

FHA loans are the most forgiving of foreclosures. To qualify for an FHA mortgage loan, you must wait at least three years after the foreclosure. The three-year clock starts ticking from the time that the foreclosure case has ended, usually from the date that your prior home was sold in the foreclosure proceeding.

If the foreclosure also involved an FHA loan, the three-year waiting period starts from the date that FHA paid the prior lender on its claim.

If you have already had an FHA loan and want to apply for another FHA loan, you might not qualify if you have been through bankruptcy or foreclosure. After going through foreclosure, you must wait three years before you can be eligible for another FHA loan.

If you’ve been through bankruptcy, you must wait two years before you can apply for a second FHA loan.

Another way you might not qualify for a second FHA loan is if you have a claim on your CAIVRS report, you must get the claim removed before you can get an FHA loan.

CAIVRS

Before an applicant can be approved for a loan they must first pass a credit screening. Most lenders use the CAIVRS system to pre-screen applicants. The acronym stands for Credit Alert Verification Reporting System.

CAIVRS is a Federal database of people who have delinquencies on any kind of Federal debt.

Delinquency records on a CAIVRS report include:

• The Department of Veterans Affairs;
• The Department of Housing and Urban Development;
• The Department of Agriculture;
• The Federal Deposit of Insurance Corporation;
• The Department of Education;
• The Department of Justice;
• The Small Business Administration

Each of these departments has access codes to use the system. CAIVRS is widely used, with about 61 thousand user IDs in existence.

All Federal Credit agencies that offer lines of credit must use the system to screen for loan eligibility. The Office of Management requires that these agencies check their applicants for Federal debt.

If the lender conducting the screening finds that you are delinquent on a debt, the CAIVRS system will list which agency has reported you as delinquent, the case number, and the kind of delinquency, whether it is a foreclosure, a lien, a claim, a judgment, or a default.

A borrower cannot be eligible for an FHA loan if their name is listed on the CAIVRS system unless they have an approved repayment plan with the Federal agency they are indebted to or they repay the debt in full.

However, three extenuating circumstances exist in which the applicant, appearing on a CAIVRS report may still be able to receive financing.

Divorce: If the other party was awarded the property, assumed payment responsibility and then defaulted on the payment after the divorce was finalized, the applicant may still qualify for a loan.
Bankruptcy: The applicant retains their eligibility if the property was included in a bankruptcy filing and the circumstances surrounding the filling can be proven out of the control of the borrower.
Assumptions: If the applicant sold property to a buyer who defaulted on an assumed payment, their eligibility for a loan will not be impacted.

It is not uncommon for applicants to mistakenly appear on a CAIVRS screening, this is an easily resolved issue. Contact your lender, find out which agency has listed you and then provide the appropriate documentation to your lender, illustrating up to date payments. This will allow your lender to get you removed from CAIVRS.

Can I get a Mortgage 2 years after Foreclosure?

It is unlikely that you will get a mortgage loan within two years of a foreclosure, since the minimum seasoning, or wait period, is three years. Federal Housing Administration lenders might reduce the wait period to two years if you can show that the foreclosure was caused by a one-time, uncontrollable event. Getting a VA loan after two years depends on any remaining entitlement you have.

Generally, borrowers whose homes have been foreclosed must undergo a waiting period before anyone will lend them money for another mortgage. Extenuating circumstances for certain types of loans, however, can actually shorten the time frame.

1. Conventional loan

After a foreclosure, it can take you seven years to get a Fannie Mae or Freddie Mac conventional loan, but sometimes shorter or longer, depending on the lender. However, this can be shortened to a mere three years if certain circumstances led to the foreclosure, such as a loss of employment, medical issue or incorrect information on your credit report, Crawford says.

2. FHA loan

You’ll have to wait three years to get a loan backed by the Federal Housing Administration (FHA), which begins when the foreclosure case ends, generally when the foreclosed home is sold. Like applying for a conventional loan, if you can prove circumstances beyond your control caused the foreclosure, you may be able to request a shorter waiting period.

3. VA loan

For veterans and those still serving in the military, the Department of Veterans Affairs (VA) requires only two years between a foreclosure and seeking a new loan.

Note that if you qualify for a VA loan, you’ll get a home loan entitlement, which is the maximum amount the VA guarantees it’ll pay the lender in case of default. “I’ve had veterans lose part of their entitlement in a foreclosure, but they still have entitlement left. It’s all about the foreclosed amount,” Crawford explains.

4. USDA loan

Available in largely rural areas, USDA loans have a waiting period of three years to qualify if you have a foreclosure in your credit history, Crawford says.

5. Non-qualified mortgage

With a non-qualified mortgage (non-QM), or a loan that doesn’t meet government standards, you could possibly get another loan right after your foreclosure, Crawford says. Note that Non-QM loans have more expensive fees, higher interest rates and also different qualifications than qualified mortgages (QM).

How long does Foreclosure Show on Credit?

Similar to medical debt and certain bankruptcies, it takes seven years for foreclosures to disappear from your credit report.

The unfortunate news is that as long as the foreclosure is listed on your credit report, your credit score will be negatively impacted by it. But just how much foreclosure impacts your score depends on what your credit was like beforehand.

The rule of thumb from FICO, a data analytics company that creates credit scoring models, is that higher credit scores are penalized more than lower credit scores. The higher your score was before the foreclosure, the more your score will drop from it.

FICO also says that the higher your score, the longer it takes for it to fully bounce back from a reported foreclosure on your credit report. Higher credit scores take more time to achieve in general and a significant drop can set you back more than would a dip in a lower credit score.

How can I Rebuild my Credit?

Even though a foreclosure stays on your credit report for seven years, you don’t want to wait that long to start rebuilding from the damage.

Below, we offer a couple tips and credit cards that can help you recover your credit score.

1. Pay your bills on time

Payment history is the most important factor for achieving a good credit score. Whether you’ve paid your past credit accounts on time makes up 35% of your FICO score calculation. We always recommend paying off your balance in full so you don’t carry it over to the next month and accrue interest, but when money is tight you should always make at least the minimum payment.

2. Keep your credit utilization rate low

Your credit utilization rate, or how much of your available credit you use, should be no higher than 30% according to experts, or even 10% utilization to see the best score. Lenders and issuers want to see that you don’t use all of your credit limit, so the higher the limit you have and the less of a balance you carry, the better. This factor makes up 30% of your FICO score calculation.

3. Apply for a secured credit card

It may sound counterproductive, but one of the best ways to build your credit score back up is to open up new credit and use it following the above two guidelines. Secured credit cards are easier to qualify for and they require a deposit upfront (usually $200) that acts as your credit limit. Applicants for the Capital One® Secured might even be able to make a lower despot and still earn the typical $200 credit limit.

The varying minimum security deposits for the Capital One Secured card are $49, $99 or $200 based on your creditworthiness — all of which come with a $200 credit limit. You can also increase your credit limit if you pay your first five monthly credit card bills on time.

And if you’re not interested in a secured credit card, but you have an average credit score right now, the Capital One® Platinum Credit Card is the best for rebuilding credit. It comes with no annual fee, no foreign transaction fees and a free credit monitoring service, called CreditWise from Capital One®.

If you had to live through a foreclosure because you were unable to pay your mortgage, know that your credit won’t be tarnished forever. Foreclosures may remain on your credit report for seven years, but maintaining payments on your other credit accounts during those seven years will help balance out the negative entry. Make sure you pay your bills on time, in full and consider applying for a credit card that can help you bounce back.

What is the Downside of an FHA Loan?

If you’re looking to finance a home purchase, FHA loans come with a few advantages that make them quite desirable:

• They have low credit score requirements.
• They require only a small down payment.
• They are fairly easy to qualify for.

But they aren’t without fault. In fact, the list of FHA loan drawbacks is actually quite lengthy.

For one, they require costly mortgage insurance, both upfront and annually, and often for the entirety of the loan term. They’re also not available for investment purchases unless you plan to live on the property, and they usually come with higher interest rates than other loan programs out there, too.

If you’re thinking of using an FHA loan, here’s a quick list of the disadvantages these mortgages come with:

• They require mortgage insurance premiums upfront and annually.
• They often come with higher interest rates.
• They’re not for use on investment properties.
• Homes must meet stringent property requirements.
• They don’t give sellers much confidence in a buyer.

Let’s take a look at each of these FHA loan drawbacks in depth.

FHA loan drawbacks to know

As you can see above, there are quite a few drawbacks to using an FHA loan. One of the biggest is the mortgage insurance premium they come with.

1. Mortgage insurance is non-negotiable

On FHA loans, a mortgage insurance premium (also called MIP) is required at the time of closing — dubbed an upfront mortgage insurance premium — and on an annual basis. The annual fee is spread across 12 months and lumped in with your mortgage payment.

The cost of mortgage insurance varies depending on your down payment, loan term, and loan amount, but you’ll usually pay anywhere from 0.80% to 1.05% of your loan amount upfront, and then somewhere between 0.45% and 0.95% annually.

On a $200,000 home purchase, that would mean $1,600 to $2,100 upfront and then $900 to $1,900 per year.

2. They usually mean higher interest rates

FHA loans often come with higher interest rates than other loans, simply because they’re riskier. Since their credit score requirements are lower, there’s a bigger chance the borrower will default on the loan. To protect themselves from this added risk, lenders will charge a higher interest rate. Keep in mind, a higher interest rate means a higher monthly payment as well.

3. You can’t use them on most investment properties

FHA loans can only be used to buy a house that will be your primary residence. They’re not intended for use on investment or income-earning properties. With that said, there is a small loophole. If you’re willing to live in the home you’re buying with an FHA loan, that’s allowable. The house just needs to be four units or smaller, and you need to move into the home within at least 60 days.

4. Your property needs to pass muster

In order to qualify for an FHA loan, a property must meet certain health and safety standards established by the Department of Housing and Urban Development (HUD). The home will also need to go through the FHA’s strict appraisal process before your loan can be approved.

Most large-scale fixer-uppers simply won’t qualify for a traditional FHA loan. If you’re looking to buy and rehab a property, the FHA’s 203k loan might be a better choice for you.

5. They won’t help you win a bidding war

If you find yourself up against other bidders, an FHA loan likely won’t help your case much. Compared to an offer with a conventional loan, for example, an FHA-backed offer means a stricter appraisal of the home and, in many cases, a buyer with worse credit and a higher chance of their loan falling through. Both are disadvantages to a seller.

Can you have 2 FHA Loans at once?

One borrower having two FHA loans at once is the exception, not the rule. The Department of Housing and Urban Development has set specific rules for this rare occurrence. Most people do not qualify for two FHA loans at the same time unless they move to a new area or significantly increase the size of their family.

Although FHA mandates you live in the home in which you have an FHA loan, there are exceptions to the rule.

No is the General Rule

HUD’s general rule is that a borrower can have only one FHA loan at a time. If the borrower wants a new FHA loan, then he usually must pay off the first FHA loan before applying for the next FHA loan.

Despite the general rule, HUD does allow one person to have multiple FHA loans in certain circumstances. Simply stated, HUD will allow multiple FHA loans when the borrower’s circumstances have changed significantly since the closing on the first FHA loan.

When You Relocate

One reason why HUD may allow a second FHA loan is if the borrower relocates to a new area that is not within reasonable commuting distance of the borrower’s existing home.

Read Also: VA Home Loan Specialist

For example, if you move to another state because of a new job, then HUD will allow you to obtain a second FHA loan in the new state. HUD has not defined what a reasonable commuting distance is, but most mortgage lenders agree that over one hour is unreasonable.

If you’re getting a divorce or otherwise moving out from a property you shared with a co-borrower, you can also qualify to get a second FHA mortgage.

In Certain Family Situations

Another reason HUD might allow a second FHA loan is if the borrower’s family size has significantly increased since closing on the first FHA loan. The borrower must be able to show that his existing home is not big enough to accommodate the new family. For example, if a borrower takes out an FHA loan to purchase a two-bedroom condo, and then has triplets, the borrower will probably qualify for a second FHA loan.

You can also be a co-signer on a loan for another family member when you have your own FHA loan.

What’s the Process? 

Assuming you qualify for a second FHA loan, you apply in the same way as you did for the first FHA loan. The lender will check your income, assets and credit history, and appraise the home you’re purchasing, the same way as before.

One significant restriction on obtaining a second FHA loan, even if you qualify for one of the exceptions, is that you can only count rental income from the first property as income on the new FHA loan application if you have at least 25 percent equity in the first property.

So, for example, if you owe $85,000 on your first home and the home is only worth $100,000, then you just have 15 percent equity, which means you won’t be able to include rental income from that home on your second FHA loan application. Without that rental income, you may not qualify under FHA debt-to-income ratio requirements. HUD requires your mortgage payment to be 29 percent or less of your gross monthly income.