A process flow for forming and encapsulating magnetic tunnel junction (MTJ) nanopillars is disclosed wherein MTJ layers including a reference layer (RL), free layer (FL), and tunnel barrier layer (TB) are first patterned by reactive ion etching or ion beam etching to form MTJ sidewalls. A plurality of MTJs on a substrate is heated (annealed) at a station in a process chamber to substantially crystallize the RL, FL, and TB to a body centered cubic (bcc) structure without recrystallization from the edge of the device before an encapsulation layer is deposited thereby ensuring lattice matching between the RL and TB, and between the FL and TB. The encapsulation layer is deposited at the same station as the anneal step without breaking vacuum, and preferably using a physical vapor deposition to prevent reactive species from attacking MTJ sidewalls. Magnetoresistive ratio is improved especially for MTJs with critical dimensions below 70 nm.