Breaking the Seven-Year Foreclosure Credit Score Myth

Losing your home to foreclosure is emotionally taxing and extremely damaging to your credit. Your credit card rates could rise, renting an apartment gets more difficult, landing a new job gets harder and you may get billed for the amount of the mortgage that the bank didn’t recover from the sale of your home.

On top of all this, that foreclosure stays on your credit report for the next seven years, a long time to wait to find a new home, too long for many. Fortunately for most, a new home may be purchased as soon as three years after a foreclosure through the FHA.

In order to qualify home seekers need a minimum credit score of 520 with 10% down, or a minimum score of 580 with 3.5% down. In some cases you can qualify for an FHA loan two years after a foreclosure, if extenuating circumstances, such as the death of the family’s primary breadwinner, caused your foreclosure. Now I know this sounds great, but the FHA does not actually write the loans but simply insures them.

These loans still come from a lender, and most lenders are unwilling to write a loan for anyone with a score lower than 640. Getting a loan with the FHA’s minimums is possible but the pool of lenders willing to take on the risk of the loan dwindles substantially for those with less than a 640 score. If your score is below a 640 and you just finished with your foreclosure, spend the next three years doing whatever you can to get your score up to 640 as this greatly increases your chances of securing a new home within three years of losing one to foreclosure.

Beyond FHA loans, veterans may qualify for a VA loan within four years of foreclosure. A traditional VA loan has no minimum credit score requirement; however you will want to have a minimum score of 620 as all secondary market investors require this for a VA loan. If you aren’t a veteran and didn’t want to try for an FHA loan then your last option beyond waiting seven years is through Fannie Mae and Freddie Mac. Fannie and Freddie were once willing to write loans for those who had a foreclosure on their record four years after the foreclosure, but in recent years that has changed and they will now only consider writing such a loan after five years has passed. The minimum credit score required for a loan through Fannie and Freddie is 620.

As you’ve likely noticed, the best thing to do after a foreclosure is to focus on getting your credit score past a 640 if you want to purchase a home again within three years of your foreclosure. While you may qualify with a lower score, finding a bank that is willing to write the loan is extremely difficult, even with FHA insurance backing it. But if you can take control of your finances and repair your credit, you may not have to wait seven years to buy a home again after a foreclosure.

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