Mortgage After Foreclosure: Can a Cosigner Help?

Nearly three million properties received foreclosure filings in 2010 -- a record for the American housing market. Homeowners may experience foreclosure because of various reasons, including extenuating circumstance such as serious illness or death of a wage earner, which cause them to default on payments. Others may experience financial distress after a divorce or job loss. Foreclosure is detrimental to a borrower's credit, making it difficult to acquire financing soon after, even with a cosigner.

The Basics

Foreclosure is the legal process by which a mortgage lender exercises its right to take possession of a property after a borrower defaults. As a result, the homeowner loses his interest in the home and his credit score is damaged by the missed payments reported by the lender as well as the foreclosure action itself. Mortgage lenders require a waiting period for serious credit mishaps such as foreclosure, short sales and bankruptcies, as these directly reflect on the borrower's ability to repay debt. During this waiting period, the borrower must re-establish good credit and recover from his financial distress before obtaining a new mortgage with or without a cosigner.

Cosigner Function

A cosigner helps an otherwise weak borrower qualify for credit due to her strong financial and credit profile. Unlike a co-borrower who also gets an interest in the real estate property by helping the primary borrower qualify, a cosigner on a mortgage only guarantees, or assumes responsibility for, making payments on the loan if the borrower defaults. Cosigners do not necessarily gain ownership interest in the property. Cosigners typically help to obtain lesser debts such as car loans, credit cards and rental leases. When used for mortgages, a parent or close relative may cosign for a borrower with minimal credit, but not someone with bad credit. The borrower must be eligible for the loan on her own merits after a foreclosure.

Conventional Waiting Period

Borrowers must wait the full waiting period before they can obtain a new mortgage. Having a cosigner does not affect the waiting period. Most mortgages are conventional loans owned by Fannie Mae or Freddie Mac. These require three to seven years after a foreclosure or deed-in-lieu of foreclosure, which deeds the property back to the lender. Three-year waiting periods apply to borrowers who can prove extenuating circumstances caused the default, while a five- to seven-year waiting period depends on the loan-to-value and mortgage program.

Government Loans

Mortgages insured by the Federal Housing Administration, or FHA loans, and those guaranteed by the Department of Veterans Affairs have less stringent waiting requirements after foreclosure. Like conventional loans, borrowers must meet FHA and VA eligibility standards on their own merits. A cosigner may serve as a compensating factor which strengthens the borrower's loan file, but may not act in lieu of basic waiting requirements. FHA requires a three-year waiting period which may be waived in the presence of a documented extenuating circumstance. VA loans require two years.