You lost your home in foreclosure so you assume that you won’t qualify for a conventional loan anytime soon, right?
We have good news for you – it is still possible to get a conventional loan and you may not have to wait as long as you thought. Today, Fannie Mae guidelines allow you to get a conventional loan as soon as 2 years after foreclosure.
Keep reading to learn how to qualify for a conventional loan after foreclosure.
Fix Your Credit
The first thing you’ll have to do is fix your credit. If you lost your home in a foreclosure, you probably lost at least 100 points on your credit score. This can make it harder to secure a conventional loan because you typically need at least a 680 credit score in order to get a conventional loan.
If you want to secure a conventional loan moving forward, you’ll need to work on your credit. You’ll need to build up as much good credit as possible. You can do that with any of the following:
- Pay your current bills on time
- Obtain a secured credit card, use it and pay off the bill monthly
- Obtain an unsecured credit card and pay off the bill monthly
- Don’t overextend your credit, which means don’t charge what you can’t pay off in full
- Have a good mix of installment loans and revolving debt
Your credit score is a combination of the following factors:
- 35% payment history – Pay your bills on time
- 30% amounts owed – Try to keep your extended credit to 30% of your available balance
- 15% length of credit history – Try to keep even old, unused accounts in good standing open
- 10% new credit – Open new accounts sporadically
- 10% – credit mix – Try to have a good mix of installment debt and revolving debt
Stabilize Your Income
Another factor lenders look closely at is your income. They want to see stable income and employment, especially after you lose your home in a foreclosure. Typically, lenders look back at the last two years to determine if your employment is stable. If you lost your home in a foreclosure, though, they are going to look at your employment/income even closer.
If you want to give lenders a reason to give you a loan after losing your home, your income and employment should be as stable as possible. This means:
Establish an employment history at the same job or at least within the same industry. Lenders want to know that you are consistent with your employment. If you change jobs, it should be within the same industry to show that you have the experience necessary to succeed.
Try to have consistent and if possible, increasing income. You want to show lenders that your risk of default is low. If you have income that is higher than it was when you lost your home, you offset the risk of default.
What lenders look for is stability and a reason to show that you are not a risk of default. They want compensating factors that make them believe beyond a reasonable doubt that you will lose your home in a foreclosure again.
If you lost your home because you lost your job or your income decreased due to circumstances outside of your control, you can show improvement by showing higher income and more stable employment. It’s important that you wait until you are at your current job for at least two years before you try to apply for a mortgage after foreclosure.
Keep Your Debt Ratio Low
Lenders are going to look at all risk factors that pertain to your loan after a foreclosure. This includes your debt ratio. Conventional loans typically require a debt ratio of 28% upfront and 36% on the back end. This doesn’t give you a lot of room for other debts, which is a good thing.
Lenders want to know that your risk of default is minimal. This doesn’t mean that you should have the maximum debt ratio allowed. Lenders would prefer if you have a debt ratio that is less than what conventional loans require.
You can lower your debt ratio by either:
- Increasing your income
- Paying off your debt
If you can do a combination of both, you’ll put yourself in an even better position to secure a conventional loan after a foreclosure.
Compensating Factors Help Too
Even if you have all of the above qualifying factors, you should still try to have some compensating factors to give lenders a reason to give you a loan after foreclosure. Compensating factors can be any of the following:
- High credit score – Conventional loans typically require at least a 680 credit score, but if you have a credit score over 700, you put yourself in an even better position
- Low debt ratio – Debt ratios, as we discussed, should be around 28/36, but if you can make your debt ratio lower, you’ll increase your chances of approval
- Reserves – If you have money on hand that can serve as an emergency fund to cover your mortgage payments if you can’t make them it can help your chance of approval
The more positive factors you can provide a lender, the better your chances of approval for a conventional loan after a foreclosure. The best way to manage the situation is to start working on your qualifying factors as soon as possible after the foreclosure. This way you can increase your chances of approval faster.Click to See the Latest Mortgage Rates»