It is not possible to refinance when you are in foreclosure. You can try but it is almost certain that no lender will approve your loan application if you are in foreclosure. At this point, it will be too late to refinance. What you can do before you miss a single payment or default on your loan is to refinance to avoid foreclosure.
During this time, the risk you pose as a borrower is extremely high. You cannot convince another bank to approve you for refinance if you are struggling with your existing mortgage terms and missing payments. The best thing you can do is to contact your lender or mortgage servicer before missing a payment or when you see signs of financial hardships in the near future. This will allow you to apply for different programs that you qualify such as restructuring the loan terms, applying for mortgage assistance, forbearance, short sale, etc.
The fact that you are in foreclosure it is an indication that you are struggling to meet your existing mortgage terms. A foreclosure process is usually triggered when you have not made a payment in a given number of months usually after 120 days. That is, you defaulted on your mortgage and the lender is trying to legally take the house from you. The lender will also communicate with you after missing payments. You will receive a notification with payment options and instructions you need to follow to keep your house.
Can you refinance when you are in foreclosure?
Refinancing a mortgage requires that you apply for a brand-new mortgage with different interest and terms. Before you get approved for the refinance, however, the lender will check your credit and runs you through the entire approval process. Every lender wants a borrower who poses the least amount of risk possible. So, being in foreclosure automatically makes you the riskiest borrower on the market.
The question is, is there any lender such as a bank, a mortgage company, or an investment company willing to approve you for refinance when you are in foreclosure? The quick answer is no. No lender will want to do business dealings with you when you are in foreclosure. Why would they approve your mortgage refinance application after proving that you cannot be able to pay them back?
The best course of action is to prevent foreclosure. Nobody knows your financial situation better than you. So, if you think you might end up falling behind on your mortgage payments, immediately talk to your lender before you miss a payment. Communicate with your mortgage lender or mortgage servicer about changes in your income and request a different payment structure to avoid a default or foreclosure.
For example, your lender can lower your monthly payment or require that you only pay the interest portion of your mortgage. Your loan terms can also be changed to meet your current financial situation. For example, if you locked in a 10-year fixed-rate mortgage and recently lost one of your jobs, your lender might change your terms to a 30-year loan to meet changes in your income.
In order for these changes to happen, you need to talk to your lender before your lender initiates the foreclosure process. You can easily lose your home when you don’t communicate with your lender.
The lending industry is all about risk assessment and risk management
Before you get approved for a mortgage, the lender will first assess your creditworthiness. The more risk you carry, the harder it will be to get approved for a mortgage. Being a risky borrower means that you are more likely to default on your loan. That is, you either have bad credit, have a higher DTI ratio, or don’t have the financial capacity to repay the amount you borrowed. Being in foreclosure automatically checks all boxes for a risky borrower.
When you are in foreclosure, every lender will deny your loan application. For this reason, you cannot refinance if you are in foreclosure. What is possible is to avoid foreclosure, then refinance. That is, it is possible to refinance a mortgage before you miss a single payment. Once you have missed payments, you are in default, or are in foreclosure, it is almost certain that no lender will give you money. So, focus on preventing foreclosure first, then refinance your mortgage.
How long after a foreclosure can I get a loan?
A foreclosure is one of the worst financial setbacks on your credit reports. Usually, a foreclosure stays on your credit report for 7 years but its effect on your credit score fades away over time. After having a foreclosure, you will have between two to seven years before you can qualify for another loan.
It will all depend on the type of loan you want and whether you have rebuilt your credit or not. For example, according to Bankrate, it will take 3 years waiting period before you can qualify for an FHA loan after a foreclosure. Different loans have different waiting periods and requirements.
Why does it take longer to qualify for a loan after foreclosure?
You can’t just qualify for a mortgage or other types of loans after a foreclosure. It will take time to restructure your finances and rebuild your credit. Given the number of points your credit score will drop and the impact of foreclosure on your credit score every year, it might take many years to rebuild your credit score.
Most lenders require 2 year waiting period before you can apply for a mortgage. Even at this time, your credit score might not have recovered depending on the measures you have taken after the foreclosure.
The fact that you foreclosed on a home, is a great indication of financial struggles. So, unless you have figured out a way to turn things around, it might take longer to qualify for a loan after foreclosure. Remaining debts could be hard to handle even after the foreclosure. Or a life event such as divorce can leave a dent in your finances and make it harder to repair your credit fast enough.
Even after the waiting period, many lenders might not approve your credit application. If your current credit situations show some red flags, lenders may still deny you credit. No one wants to take extra risks. The bank will rather keep its money in a vault than give it to you knowing that you cannot pay it back.
How does foreclosure affect your credit?
Besides staying on your credit report for 7 years, the foreclosure will negatively lower your credit score. You should expect your credit score to drop at least 100 points. According to Cesisolutions, people with excellent credit scores can lose as many as 160 points from foreclosure.
It is also important to understand that once you have a foreclosure on your credit reports, you might find it difficult to qualify for other financial products. That is, you can’t qualify for other loans until after 2 years or more. You could also lose the ability to qualify for an apartment, get a job, or qualify for other business dealings.
How to avoid foreclosure?
The moment you realize you might not meet your monthly payments; it is time to talk to your mortgage lenders or mortgage servicer. The earlier you communicate your financial struggles, the better. Be honest and true. This will allow your lender to evaluate your situation and help you make affordable payments on your mortgage.
The following are ways to avoid foreclosure on a home.
- Short refinance. Although you cannot refinance when in foreclosure, your lender can agree to refinance your home before you get into foreclosure with a short refinance. Your mortgage refinance is referred to as short refinance or loan modification when the lender agrees to refinance your mortgage at the current price of the property and agrees to forgive any remaining balance.
- Loan modification. If you want to keep the house and are willing to continue making payments, your mortgage lender might agree to modify the terms of the loan. The purpose of loan modification is to make your monthly payments affordable. There are three ways your lender can modify your mortgage terms.
- Forgive the principal amount. This usually happens when you owe the lender more than the value of the home. For example, if you owe $300,000 and the home is now worth $250,000, the lender might agree to consider the current value of the home and forgive you the difference.
- Lower your interest rate. If you cannot afford your monthly payments due to higher interest rates, your lender might agree to lower your mortgage rate which in turn will lower your monthly payment.
- Increase your terms. In case you have locked in a lower mortgage term, the lender can increase the term on your mortgage to make it affordable. For example, your mortgage servicer can change your terms from a 15-year fixed-rate mortgage to a 30-year fixed-rate mortgage. Keep in mind that longer terms will increase the cost of the home due to paying interest charges over a longer period.
- Short sale. Unlike short refinance, a short sale happens when you work with your lender to sell your property to avoid foreclosure. During a short sale, the lender will decide the final sales price. In addition, you might owe the lender the difference if the house is sold at a much lower price than you owe. For example, if your mortgage balance is $200,000 and the house is sold for $180,000, you will owe the lender $20,000. Your lender might forgive the remaining balance or require that you pay it in full or a portion of it.
- Sell the house yourself. This is effective only before you get into financial struggles. For example, if you think you might not afford your payments due to an anticipated financial setback, you can sell your home ahead of time. This will give you a chance to sell the house at a Fair Market Value (FMV) price and avoid wrecking your credit.
How to recover from foreclosure?
Yes, the foreclosure will have a negative impact on your credit and leave a dent in your finances. But losing your home in foreclosure is not the end of the world. What you do after foreclosure determines how you recover from foreclosure.
1. Restructure your finances
The first and most important thing you can do after foreclosure is to restructure your finances. You need to answer the following question: Why did I have foreclosure?
Did you end up in foreclosure because you spend most of your money and forget to pay your debts? Did you find yourself in additional financial obligations such as emergencies that were not counted for? Or maybe you are financially irresponsible and don’t understand how your financial decisions affect your pocket. You will need to know what you did wrong to protect yourself moving forward.
You must avoid any questionable decisions that led to foreclosure. The following tips can come in handy when you are trying to recover from foreclosure.
- Make a budget.
- Reduce your expenses. No more impulse shopping, buying brand-name products or eating out a lot.
- Establish financial rules. Know how much you allow yourself to spend.
- Put in place weekly, monthly, and yearly saving goals.
- Build an emergency fund.
- Do not hang out with the wrong people.
2. Focus on rebuilding your credit
Foreclosing on a home is not easy. It is both mentally and financially challenging. The effect of foreclosure on your credit will also be immense. That is why the next thing you need to do to recover from foreclosure is to rebuild your credit. The process of rebuilding your credit is simple and straightforward. Although there are many companies that can help you rebuild your credit and improve your credit score, you don’t need to pay anyone to help you rebuild your credit. You can do it yourself for free. The following tips can help you rebuild your credit and boost your credit score in no time.
- Start by paying your bills on time. Paying your bills on time is the biggest factor in your credit score. If you have any credit accounts, make your payments on time and avoid carrying balances from month to month.
- Check your credit reports and dispute any errors, or inaccuracies, and keep them up to date.
- Monitor your credit score and put more effort into activities that improve it faster.
- Lower your credit utilization on your revolving credit accounts such as credit cards.
- Do not engage in excessive borrowing to avoid extra debts and increase your DTI ratio.
- Pay off your existing debts to improve your debt-to-income ratio.
- Become an authorized user of an existing good credit account.
3. Improve your financial mindset
Being in foreclosure indicates that you have borrowed more than you were supposed to or are financially irresponsible. Either way, your financial mindset is what led you to make such decisions. In order to properly recover from a foreclosure, you need to change the way you view your finances.
You need to start practicing living below your means and adopting frugal living habits. Do you want a brand-new car? Well, most people do. But not everyone buys a new car. That car can wait until you have raised enough money to buy it with cash. Or maybe you don’t need to buy a new car at all. Can a few thousand dollar used cars do? The answer is yet. So, buy a used car. In case you are wondering, here are the reasons to never buy a new car and why you should buy a used car.
Don’t spend money because people around you are spending. Establish your own financial goals and live your own life on your own terms. If people around you are spending money, let them spend it. You don’t want to repeat the same mistake.
You don’t need to eat out every single day. Yes, restaurants cook good meals but not as good as you can make for yourself. In addition, you will save more money if you make your own meals.
It is all about mindset and the way you view money and your finances. Don’t apply for that extra credit card just because some banks pre-approved you for a credit card. Borrow only when you need to. Stop craving expensive stuff. Only focus on changing your financial habits.
How to buy a home after foreclosure?
If you recently had a foreclosure on your home, it is not a good idea to think about buying another home right away. This is because lenders have a waiting period before you can qualify for a loan. Depending on the loan you want, it may take anywhere between 2 to seven years before you can meet the needed qualifications.
Besides the waiting period, you also need to meet other loan application requirements such as having a good credit score, a lower DTI ratio, and a good income to pay off the loan amount. This is why it is crucial to rebuild your credit after foreclosure and adopt new financial habits that allow you to recover from the foreclosure.
To avoid another foreclosure, you need to save for a large down payment. Having a 20% down payment is always a good idea. The more you put down, the less money you will borrow which in turn lowers the risk of defaulting on your loan.
You should also buy a house that is within your financial reach. Just because you have been pre-approved for $700,000 doesn’t mean you should look for a $700,000 home. Create a budget for and buy a house that meets that budget. You should also shop around and sign up for a mortgage with the lowest interest rate possible and better terms.
Even if you want to pay off the house fast, always choose longer terms. You can still pay off the house faster if you have extra cash. Longer terms come with lower monthly payments.
