If you lost your home to a foreclosure, you probably think our chances of getting a mortgage are long gone. Luckily, that’s not the case. You can even get a government-backed loan, such as the USDA loan, just 3 years after the loss of your home.
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Of course, you’ll have to meet certain requirements. We discuss them below.
What is a Foreclosure?
First, let’s look at the definition of foreclosure. It occurs when you lose your home due to being unable to make the payments. The bank that holds your loan then had the right to take your home because it is the collateral for the loan. The bank probably took possession of the home and turned around and sold it to another buyer to try to make some of their money back.
The Waiting Period After a Foreclosure
So you lost your home, now you are ready to buy another one. You don’t have a down payment, so you think the USDA loan would be a good idea. It might be a great idea, but first you must know the requirements.
As we already stated, you must wait three years after the date of the foreclosure was finalized. This is not the date the bank initiated the proceedings, as that could take months to eventually finalize. It’s the date you had to be out of the house and lost possession of it.
There are exceptions to this rule, though. The USDA may allow what they call hardship exceptions. These are unique exceptions for borrowers that experienced circumstances that were outside of their control. A few good examples include:
- Medical emergency that caused you or another adult making an income in your home to be unable to work
- Death of an immediate family member
- Divorce which resulted in the loss of household income
If you can prove that the hardships you experienced were temporary and were due to one of the above situations, you may qualify for the hardship exception.
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The Other Requirements
Qualifying for a USDA loan after foreclosure will look similar to the process you went through when taking out your original mortgage. You’ll need:
- A credit score of at least 640 – At the very least, you need a 640 credit score, but a 660 credit score will make the process even easier. Borrowers with a 660 or higher credit score are able to obtain automated approvals and need less documentation. Borrowers with a 640 may still get approved, but will undergo a bit more scrutiny and may have to provide more documents.
- A mortgage payment that isn’t more than 29% of your gross monthly income – This is the maximum USDA front-end debt ratio.
- A total monthly debt that doesn’t exceed 41% of your gross monthly income- This is the maximum USDA back-end ratio.
- At least a 2-year stable history at your current job – The less job hopping you have, the more stable you will look to a lender. Stability usually equals a lower risk of default, which can work in your favor.
- A rent history following the foreclosure that shows timely payments – It’s best if you don’t have any late rent payments within the last 12 months.
Some factors can help you offset other negative factors. Below we discuss the compensating factors you may be able to use to offset something like a lower credit score or higher debt ratio.
USDA loans don’t necessarily require you to have reserves on hand, but if you have them, it can work to your benefit. This is especially true if you are applying for a mortgage after a foreclosure. The lender can view your reserves as a way to have additional backup should your income stop.
Any proof that you can provide the lender that shows your foreclosure was a result of a temporary issue could also help. You can always write a Letter of Explanation that fully details the reasons, but any supporting documentation could help even more. Supporting documentation could be court papers or medical records, as a couple of examples.
Qualifying for a USDA loan after a foreclosure is possible – you just have to make sure you understand the qualifications needed. The better the circumstances, the more likely the lender is to approve your loan despite the loss of your previous home. Your best bet is to wait three years and take that time to fix your credit, stabilize your income, and get everything in order. This way when you apply for the new USDA loan you will be ready to take the loan responsibility.