Getting back in the game after a foreclosure
The peak market in South Walton Beach and Panama City Beach topped out in 2007. We are now 6 years past the peak market and many distressed sellers are now shifting into potential buyers.
Many of our past clients and new clients have been contracting us about being financial capable of purchasing a home post foreclosure or short sale. The question is, when will their credit allow them to purchase their next home?
Unlike the past with 100% loans with little to no documentation, new financing guidelines are significantly stricter than they were 5 to 7 years ago. Here are some highlights from a recent article published on current lending requirements for buyers with a foreclosure or bankruptcy on their credit history…
Rules for qualifying for a mortgage vary widely between lenders and loan programs, but one of the most-often used loan programs is the FHA mortgage.
FHA mortgage requirements for foreclosures and bankruptcies (consult a local lender for exact details):
- A foreclosure that was discharged three years ago
- A bankruptcy discharged two years ago
- A short sale settled two years ago
However, the details of how a home buyers must qualify diverges widely from the way sub-prime home buyers were qualifying for loans in the past. The new practices, while still generous to the buyer, create far greater protections for the lender and the American public who, in the long run, foot the bill for defaults.
Home buyers with foreclosures, short sales and bankruptcies on their records need to show a consistent history of pristine credit since the time of their foreclosure.
Additional FHA requirements (consult your local lender):
- On-time bill payment on all credit accounts since the foreclosure/bankruptcy
- A 640 credit score (responsible credit use is absolutely essential to gain this score 3 years out of foreclosure)
- A verified down payment (3.5% or higher, depending on the borrower)
- Upfront and ongoing mortgage insurance (which protects the lender from debts in case the buyer defaults)
- Significantly lower debt-to-income ratios (ensures the buyer has ample discretionary income to make payments long-term)
Underwriters scrutinize these borrowers’ loan applications far more than an average home buyer. In contrast, during the real estate boom, a buyer could be approved for a mortgage with very little credit history to support it.
Compare the current FHA requirements to the Sub-prime mortgage approvals at the height of the real estate boom:
- 580 credit score
- 100% Financing or 80/20 1st/2nd mortgages (no money down)
- Foreclosure 2 years out
- Bankruptcy 2 years out
- No income verification
- Total debt ratios up to 60%
While the changes in lending to borrowers who have past foreclosures, short sales and bankruptcies may not satisfy all critics, there are also mitigating factors that underwriters take into consideration.
Even though a home buyer’s past foreclosure may have been closed as of three years ago, the banks sometimes take up to a couple of years to push a foreclosure through. That person may have essentially handed the home back to the bank five years ago and been repairing their credit ever since. Underwriters can take this into account.
It is critical that borrowers work to repair their credit and wait out the FHA loan requirements for foreclosures, short sales and bankruptcies.