It is currently estimated that more than 10% of all homes in America are either late on their mortgage payments or in the process of foreclosure. While going through a foreclosure or a short sale is an emotionally painful process, many people wonder if they will ever own a house again. A few decades ago, buying a house after a foreclosure was next to impossible; local banks would often refuse to loan to anyone with a foreclosure on their records, forcing people who wanted to buy again to use services that charged high fees and interest rates. Today, however, the rules are different.
While plenty of people with recent foreclosures and bankruptcies on their records got home loans during the early part of this decade, banks have made it more difficult to get a mortgage, but not impossible. Financing is available for those who have a down payment, can prove they have the ability to make monthly payments, and are willing to put up with a few hassles.
The most significant change for people looking for a new mortgage is the requirement of a down payment. While many banks are refusing to accept less than 20% of the total purchase price of the home, there are lenders willing to drop this figure to as little as 5%. Unfortunately, traditional no down payment options for buying a house, such as FHA and VA loans, require that a borrower has never gone into a foreclosure, and that at least seven years has passed since you last declared bankruptcy. “Piggyback” loans, or the practice of taking out two loans in order to purchase a house (typically with one to cover the down payment at an adjustable interest rate) have also fallen out of favor with many banks, after many of them realized that these second loans were not repaid when a house went into foreclosure. Therefore, expect to need at least 10% of the total purchase price of the house in cash before looking to buy again.
Secondly, you must be able to prove that you are capable of making the monthly payments, even in the event of a job loss or other personal disaster. In addition to showing that the total monthly payment (including interest, principal, taxes, and insurance) is equal or less than 33% of your net salary, you will have to show a significant emergency fund. Many lenders are requiring at least 6 months of mortgage payments to be held in either a checking or savings account. Note that this is separate from the money that you must put aside for the down payment.
Finally, be willing to put up with a few hassles. Realize that finding funding for your new home will still take a while, even if you meet these financial requirements. Many lenders are requiring at least three years to elapse from your foreclosure or bankruptcy before they will loan to you. A few have gone back to a seven year requirement, but many financial experts agree that these restrictions will not last long with the number of people who will be looking to purchase a home again within the next few years. Expect delays in the processing of your application as well; many lenders do not have adequate staff to deal with the number of specialty applications that they are receiving.