Securing Mortgages After a Foreclosure
The Necessity of Non-QM Loans
A foreclosure is considered a Significant Derogatory Credit Event (or Housing Event), often grouped alongside short sale (SS), deed in lieu of foreclosure (DIL), and mortgage default modification.
Traditional government and conventional loans impose mandatory waiting periods after a foreclosure or bankruptcy. Non-QM loans serve as a crucial alternative for borrowers who are ready to purchase a home but cannot qualify due to not meeting these traditional waiting periods. Non-QM loans offer flexibility regarding credit issues, including foreclosure. Some lenders may even allow a borrower to obtain a Non-QM loan as soon as a day after the foreclosure event is completed, facilitating quicker re-entry into the housing market. Basically it is a lot easier to secure mortgages after a foreclosure.
All Non-QM loans require the us to assess the borrower’s Ability-to-Repay (ATR) the mortgage debt. The underwriting decision depends on various factors, including the borrower’s credit score, down payment amount, and the seasoning period elapsed since the credit event.
Seasoning Requirements for Foreclosure
The term “seasoning” refers to the mandatory waiting period required following the completion, discharge, or dismissal date of the derogatory event, measured up to the new loan’s note date.
Specific seasoning requirements for foreclosure vary significantly across different Non-QM programs:
| Our Program Types | Seasoning Requirement (Foreclosure) | Key Restrictions & Details |
| Prime Non-QM Series | No seasoning required for a single Housing Event, provided it is settled prior to close and is not a bailout for the subject property. | If there are multiple Housing Events, a three (3) year seasoning period is required from the date of the last event. |
| Edge Standard | 2 years seasoning. | One year seasoning is permitted with an additional Loan-Level Price Adjustment (LLPA) applied. |
| Edge Elite | 4 years seasoning required. | A written explanation (LOE) is required for any recent credit event less than 4 years old. |
| Advantage Standard/Expanded | 24 months (2 years) seasoning (Max. 80% LTV). | Seasoning increases to 4 years if the LTV is greater than 80%. |
| Connect Program (Full Doc/Alt Doc) | Borrowers who completed a foreclosure within the four years preceding the application date are not eligible. | N/A |
| Sharp Standard | >=24 months (2 years) clean derogatory housing event history. | N/A |
| DSCR (River Series) | 3 years since the completion date. | Multiple derogatory credit events require a 7 year seasoning period. |
If a property was surrendered in a Chapter 7 bankruptcy, the bankruptcy discharge date is used for seasoning, but bankruptcy papers must be provided to confirm the surrender.
Key Underwriting and Financial Considerations
A. Documentation and Explanation
We require a written explanation (LOE) from the borrower for derogatory credit information, particularly for housing events like foreclosure or bankruptcy that occurred in the most recent two years. This explanation helps the originator determine whether the credit issues were due to extenuating circumstances (factors beyond the borrower’s control) or financial mismanagement. The LOE should be consistent with the adverse information reported.
B. Multiple Credit Events
The seasoning period starts from the date of the most recent event when multiple derogatory credit events are present. Borrowers who have experienced foreclosure on their primary residence as well as an investment property (two separate properties) within the guideline look-back period are considered to have multiple housing events. In some programs, borrowers with unrelated multiple significant credit events are ineligible.
C. Financial Requirements
Because Non-QM loans cater to unique financial situations and potential risks associated with prior foreclosure, they typically involve different financial requirements compared to traditional loans:
- Down Payment: Non-QM down payment requirements usually range from 10% to 30%. The required down payment is determined by the borrower’s credit scores and the length of time that has passed since the foreclosure event.
- Interest Rates: Non-QM mortgage rates are generally higher than government and conventional loan rates, as they compensate us for the greater risk associated with the borrower’s unique financial history.
- Deteriorating Credit: If the credit report contains an open derogatory dispute, the report may be considered invalid, and the dispute must be resolved before the loan can close. Furthermore, all judgments or liens affecting title must generally be paid off prior to or at closing.
D. Long-Term Strategy
Non-QM loans offer a crucial immediate pathway to financing after foreclosure. Once a borrower’s credit is re-established and they meet the requisite mandatory waiting periods set by the government, they have the option to refinance their Non-QM loan into an FHA or Conventional loan to potentially secure a lower interest rate and reduce monthly payments.
FAQ's
The seasoning required for foreclosure (and Short Sale/Deed-in-lieu) is 2 years (24 months), provided the borrower keeps the Loan-to-Value (LTV) at 80% or less.
Foreclosure requires 4 years seasoning if the Loan-to-Value (LTV) is greater than 80%.
Yes, homeowners with Non-QM loans can consider refinancing to FHA or Conventional loans to potentially secure a lower interest rate once they qualify under traditional guidelines.
All loans that are subject to Regulation Z must comply with the Ability-to-Repay (ATR) rule provisions in the Truth in Lending Act.
For some programs, like the Non-QM Connect program, borrowers who completed a foreclosure within the four years preceding the application date are not eligible.
Non-QM Mortgage Rates are normally higher than traditional loan rates because these loans are designed to cater to unique financial situations and pose a greater risk to the lenders.
Non-QM mortgages sought one day out of bankruptcy and/or foreclosure require a 30% down payment.
Yes, some lenders will allow a borrower to obtain a Non-QM loan as soon as a day after the foreclosure event is completed.
Foreclosure is defined as a Housing Event or a Significant Derogatory Credit Event.
Non-Qualified Mortgage (Non-QM) loans are crucial options for borrowers who cannot meet the mandatory waiting period required by government and conventional loans after a foreclosure.
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