Losing your house to foreclosure is one of the worst feelings in the world. You worked hard to save up and purchase the home, and this is where you planned to raise your family and create memories – yet it only took one event (loss of employment, divorce, illness) to flip your financial life upside down and put your mortgage payment out of reach.
Being forced out of your house can take embarrassment and shame to a whole new level. But while it’s not the best situation to be in, a foreclosure isn’t the end of the world either. You can take comfort in the fact that many have been able to buy again after foreclosure—and so can you.
You won’t qualify for a new mortgage overnight, however. Here’s what you need to do to ensure you’re able to get a home loan again in the future.
1. Wait Three to Seven Years
If you lost your home after a job loss or another financial hardship, getting back on your feet can ignite the desire to own again. But even if you’re doing better financially and you can afford to purchase again, a foreclosure in your recent past will put the brakes on any mortgage application.
A foreclosure isn’t a minor ding on your credit report. It’s a major derogatory item that can take hundreds of points off your credit score. Plus, a foreclosure remains on your credit report for up to seven years. You’re a risky borrower, and lenders aren’t going to take any chances. You have to wait at least three years before you can qualify for an FHA mortgage and seven years before you can qualify for most conventional loans. Some mortgage lenders will reduce the wait period depending on the circumstances surrounding the foreclosure and the size of your down payment, but there are no guarantees. Speak with a mortgage lender to discuss your options or to see if you can qualify sooner.
2. Reestablish Your Credit
Your credit score will drop significantly after a foreclosure. And the higher your credit score before the foreclosure, the more points you’ll lose. Fortunately, bad credit is fixable. So if you’re thinking about buying again in the next few years, now’s the time to start preparing your credit score. If you have other bills, continue to pay these on time or improve your existing payment history. Now isn’t the time to fall behind on credit cards, auto loans, and student loans. Positive credit activity is more important than ever. If you don’t have other credit, contact banks and compare secured credit cards. You’ll need a security deposit to get one of these cards, but secured cards are much easier to qualify for with bad credit. Just make sure the issuing bank reports your activity to the credit bureaus on a monthly basis. A good payment history helps increase your FICO score.
3. Ask Your Landlord to Report Rent Payments
Some renters don’t realize how timely rent payments can build or rebuild their credit history. The problem, however, is that many landlords don’t report rent payments to the credit bureaus. A renter can make on-time payments every month for years, yet his credit report never reflects this positive history. Since renting is the only option after foreclosure, ideally you’ll want to rent from a landlord that reports payments to Experian RentBureau. If a landlord doesn’t currently report, there’s the option of enrolling in a rent payment service that partners with Experian. The service will collect and send your rent payments to your landlord, and as a bonus, you can opt to have your rental payment history reported to Experian RentBureau.
4. Increase Your Savings Account
Low down payment mortgages are making it easier for buyers to qualify for mortgage loans. An FHA mortgage only requires a 3.5% down payment and a conventional mortgage requires a 5% down payment (although first-time homebuyers with higher credit scores may qualify with only a 3% down payment). Unfortunately, a foreclosure in your recent past ruins your chances of getting a low-down payment loan. This doesn’t mean you need the traditional 20% down payment, but you will need to bring more cash to the table. In addition to closing costs, which can costs as much as 5% of the mortgage balance, most mortgage lenders will require a minimum 10% down. If you’re buying a $200,000 house, that’s $20,000 for a down payment plus up to $10,000 in closing costs.