If I walk away from my mortgage, will I be able to buy another home?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I am seriously upside down on my mortgage. I have an interest-only mortgage that is resetting to a higher payment and I'm over $120,000 underwater. I can afford the new payment but can't stomach throwing any more money down the rat hole. How long would it be before I could buy another home if I walk away from this one? - Pete, Las Vegas, Nev.

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Dear Pete,

You can buy a home after walking away from a mortgage, but it won't be easy, and there are other considerations. You live in Nevada, which is a state that allows lenders to sue defaulting borrowers to recover deficiencies. What that means is that your lender can sue you for the difference between your mortgage balance and what the home fetches in a foreclosure (probably even less than its current value). if you have any resources (such as savings for your next home's down payment), the lender is likely to try and wrest them from you in court.

Your credit problems will be just beginning. If your credit score today is 720, expect it to drop to a range of between 570 and 590, and expect it to take at least three years for your score to recover. This could affect your chances of renting a new home, finding a job if you should need to do so, the cost of your insurance. Your interest rates on credit cards could skyrocket (this is called a default rate) to about 30 percent, or your accounts could be canceled.

Bad credit and mortgage lenders: Can you buy a home after foreclosure?

You can; it involves reestablishing your credit to get your scores up to required minimums and saving a substantial down payment. Here's the breakdown of waiting periods and down payments for Freddie Mac, Fannie Mae, and mortgages for people with bad credit. Note that you won't get the break afforded by "extenuating circumstances" because you can afford to make your payments and are choosing to walk away.

Foreclosure with an FHA loan

  • 3-year wait before being able to get a loan
  • Reduced wait if the borrower can show extenuating circumstances and re-establishes good credit

Foreclosure with a Fannie Mae loan

  • 7-year wait from the completed foreclosure sale date
  • 3-year wait if the borrower can show extenuating circumstances. Additional underwriting requirements apply for 4 years after a 3-year waiting period.
  • 7-year wait for a second home, cash-out refinancing, or an investment property

Foreclosure with a Freddie Mac loan

  • 5-year wait from the completed foreclosure sale date
  • 3-year wait if the borrower can show extenuating circumstances

Other strategies

You can reduce these time frames by choosing a short sale instead of foreclosure. With a 20 percent down payment, for example, you could buy a new home using a Fannie Mae lender in two years instead of seven, or an FHA mortgage in three years. Other options include a bad credit mortgage, loans from private individuals (this is called "hard money" and it costs several points upfront and your mortgage rate could be over 15 percent), or getting owner financing.

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