The last thing homeowners in the midst of foreclosure are thinking about is buying a new home, especially since the process can leave you not only emotionally exhausted but also financially vulnerable. Yet after diligently repairing your credit and putting some money into savings, most people can expect to have a second chance at homeownership.
A foreclosure doesn’t need to be the end of the world. In fact, it can be a life lesson that teaches you how to be more financially secure and safeguard your possessions. The following is a list of steps that can be taken to become a homeowner again.
Wait Three to Seven Years
The waiting period to buy after foreclosure is usually three to seven years. During this time, you should actively improving your credit score and saving money.
Since a foreclosure significantly tarnishes your credit report, reducing your score by hundreds of points, it takes serious dedication to bring your rating back up. It takes at least three years before you can qualify for an FHA mortgage and seven years before you can qualify for a traditional mortgage loan. These timelines can be somewhat reduced if the bank takes into consideration the circumstances surrounding the foreclosure, the status of your credit rating and the size of the down payment
“Many folks have rough times in their financial life, and then are excellent credit risks afterward,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “If you can demonstrate a willingness and ability to make payments in the future, you can get a loan to buy a home.”
Repair Your Credit
Repairing your credit score after foreclosure is no easy task, especially since the higher your rating before foreclosure, the more points you can expect to lose. The key is to start amending your credit rating as soon as possible after a foreclosure by adhering to the following steps:
- Pay your bills on time, including credit cards, car loans and student loans, and improve your payment history.
- If your credit cards have been cancelled, obtain a secured card that you can pay off each month.
“Stability is the key,” says Craig Jarrell, president of IberiaBank Mortgage Co. in Dallas. “Have you demonstrated that you are now capable of owning a home and paying the bills, and have recovered from whatever circumstance caused the original foreclosure?”
Ask Landlord to Report Rent Payments
Rent payments play a crucial role in rebuilding your credit, therefore it is helpful if your landlord reports your rent payments to the credit bureaus. Despite making timely monthly payments, this information will never appear on your credit report unless it’s reported. Since renting is usually the only option for homeowners after foreclosure, they should ensure that their landlord reports payments to Experian RentBureau. If your landlord is unwilling to cooperate, you have the option registering with a rent payment service that shares information with Experian. These services will send rent payments directly to your landlord and report these payments to Experian RentBureau.
According to Experian, “Every 24 hours, Experian RentBureau receives updated rental payment history data from property owners/managers, electronic rent payment services and collection companies and makes that information available immediately to the multifamily industry through our resident screening partners. This quick turnaround and robust data impacts every point of decision making – from identifying higher-quality residents and improving bad-debt recovery to streamlining the collections process.”
Begin Saving Money
Past foreclosures make it nearly impossible to get a low down payment mortgage loan, therefore it is necessary to be able to make a substantial down payment to qualify for a loan. FHA mortgages require a 3.5% down payment and bank mortgages require a 5% down payment. Most lenders will request a minimum of 10% as a down payment, therefore when buying a $200,000 house, you will need a $20,000 down payment, as well as an additional $10,000 in closing costs.
“If you can make a large down payment on a home—like 30% or more—that can sway a lender who’s on the fence about your creditworthiness. Receiving more upfront cash reduces a lender’s potential liability if you default and require them to foreclose. A good rule of thumb is to wait at least 2 years before trying to buy a home after a foreclosure. That’s enough time for your credit scores to show some improvement—if your overall financial situation is the same or better,” says Laura Adams, a personal finance expert and award-winning author of Money Girl’s Smart Moves to Grow Rich.