It is not easy to buy a home or refinance a mortgage if you have had a foreclosure or bankruptcy, but the good news is it is not impossible by any means. How easy or difficult it will be will depend upon several factors, such as the type of bankruptcy you had – 7 and 13 are the most common.
How to Get a Mortgage After a Foreclosure
Foreclosure is a challenging and distressing experience, but it doesn’t have to be the end of your homeownership dreams. With time, effort, and the right approach, you can work your way back to securing a mortgage and buying a new home. Here’s a comprehensive guide on how to get a mortgage after a foreclosure.
1. Rebuild Your Credit:
Foreclosure significantly impacts your credit score, making it essential to begin rebuilding your credit as soon as possible. Start by obtaining a copy of your credit report to assess your current financial situation. Dispute any inaccuracies and create a plan to improve your credit.
Pay Your Bills on Time: Consistently paying your bills on time is crucial for credit score recovery. This includes credit cards, loans, and other financial obligations.
Reduce Debt: Lower your outstanding debt by paying down credit card balances and loans. A lower debt-to-income ratio is more attractive to lenders.
Open New Accounts: Consider opening a secured credit card or a small personal loan to establish a positive payment history.
Use Credit Responsibly: Demonstrating responsible credit use is key. This means keeping credit card balances low and only taking on new credit when necessary.
2. Choose the Right Mortgage Program:
There are various mortgage programs available, and some are more forgiving of a past foreclosure than others.
FHA: The Federal Housing Administration (FHA) offers mortgage loans with more lenient credit requirements. After a foreclosure, you might qualify for an FHA loan with a waiting period of three years.
VA: If you’re a veteran or an eligible servicemember, VA loans are an excellent option. These loans often have no down payment requirements and competitive interest rates.
Conventional: Conventional loans typically require a waiting period of seven years after foreclosure. However, you may be eligible sooner if you can show extenuating circumstances that caused the foreclosure.
4. Document Your Recovery:
Lenders are interested in more than just your credit score; they want to see that you’ve taken steps to rebuild your financial health. Provide documentation that supports your recovery efforts, such as records of consistent bill payments, proof of savings, and a steady employment history.
While a foreclosure can be a significant setback, it doesn’t have to be the end of your homeownership aspirations. By rebuilding your credit, saving for a down payment, and choosing the right mortgage program, you can work your way back to becoming a homeowner. Remember that patience and persistence are key when seeking a mortgage after a foreclosure. Work with professionals who can guide you through the process, and, over time, your homeownership dreams can become a reality once again.
But with some extra work and discipline, there is no reason you cannot refinance within a reasonable time of the bankruptcy of foreclosure.
Here are some 7 ways to get a mortgage after a Bankruptcy or loan default:
#1 Refinancing a Mortgage After Foreclosures or Bankruptcy
The majority of Americans file either Chapter 7 or Chapter 13 bankruptcy; the former is the most common. It involves the bankruptcy court imposing a liquidation where most of the debts are wiped out. Chapter 13, on the other hand, sees your debts reorganized, and there is a payment plan set up.
If you want to get a HUD-insured mortgage or an FHA refinance, you only need to wait two years after you filed for bankruptcy. For many Chapter 7 cases, you may be able to get a mortgage or to refinance two years after the bankruptcy was discharged.
However, a Chapter 13 bankruptcy does not disqualify you from getting an FHA mortgage, if the lender shows that one year of the pay-out period has gone by and you have made payments on time. Yes, there are still government-insured mortgage-loans for people with bad credit.
If you are looking for a mortgage or refinance from a private lender, you may be able to get a mortgage sooner than two years; you will need to check with various conventional lenders to determine what their standards are.
#2 Clean Up Your Finances
What many people who go bankrupt or experience a foreclosure don’t understand is this: Many lenders do not particularly care if you had one of these events in the last two or three years. While your black marks will stay on your credit report for seven or even 10 years, the credit bureaus see older bad behavior not as unfavorably as recent bad behavior.
What IS important is that you show you have come out on the other side and have your finances in order. If you are thinking about applying for a mortgage in the next year or two, make sure that your current financial profile is clean. Pay all of your bills on a timely basis. Keep your balances under control, and your credit score will rise with time. If you can get your scores up after a few years, you won’t have to pay the higher rate that goes along with the home loans and bad credit.
Learn how to get qualified for a mortgage after a short sale or foreclosure.
There are new programs to assist borrowers looking to get back on their feet after financial problems.
#3 Get Your Score as High As You Can
Getting your credit score as high as possible is actually fairly easy: Pay everything on time. Never be late, and keep your credit card balances down. Also, don’t open up too many new accounts within the first year after your bankruptcy or Chapter 7/13.
Getting a mortgage after a bankruptcy or foreclosure is a great way to begin the process of re-establishing your credit.
#4 Consider the HARP Program
If you are upside down on your mortgage and need to refinance and lower your payment, the HARP program can be very useful. You may have trouble finding a regular lender to work with you because you have no equity and your credit is probably bad.
The HARP program was introduced in March 2009, and it lets borrowers who are underwater on their mortgage to refinance into a lower-cost mortgage.
HARP looks for borrowers with LTV ratios that are no higher than 80% and have few late payments over the last 12 months. This program could be appropriate for you if you had a bankruptcy or foreclosure at least a year ago, and held onto your home.
This can be a good program for many in trouble borrowers because you do not need to get a new appraisal in many cases. With HARP, you may be able to get a lower rate, a shorter-term loan, and also change from an adjustable to fixed-rate mortgage. And of course, you do not need to have a minimum credit score. By no means is the HARP considered a “bad credit refinance mortgage”, but there is no set minimum score requirement.
What you will need with HARP is to have a steady payment history for at least the last year.
#5 Save Money for a Down-Payment
If you want to get lenders to take a chance on your after a foreclosure or bankruptcy, you can convince them by coming to the table with at least 10% down, and 20% is better.
If you show that you have more money in the deal, the lender may be more likely to approve for a mortgage after a foreclosure or bankruptcy. $0 down home loans are extremely difficult to secure after a bankruptcy or foreclosure, so start saving for a down-payment.
#6 Try to Have a Co-Signer
If possible, get a co-signer on your home loan so that you can qualify. Just make sure that you will always make the payments on the home or you will damage your co-signer’s credit.
#7 Shopping for a New Mortgage Lender
There are many lenders out there who have firm guidelines for borrowers who’ve emerged from bankruptcy or foreclosure. But the truth is, you can find a lender who is willing to work with you. What they’ll want to see is that you’ve gone through the waiting period, reestablished your credit, and bolstered your savings.
Government-backed loans, such as those from the Federal Housing Administration (FHA), Veterans Administration (VA), or the U.S. Department of Agriculture (USDA) are your best bet to obtain a mortgage. Most lenders offering these loans will explain there’s a minimum credit score requirement and other strings attached, but generally, a government-backed loan will be easier to obtain. Additionally, it might even be possible to qualify for a 0% down payment.
You can find a lender through banks, credit unions, mortgage brokers, and more. Be specific when talking about loans backed by the VA (which you must be qualified for as a military veteran), or the USDA (which provides rural housing services in designated areas only). It’s best to find out if the lender you’re considering is registered in the state where you’ll be looking for a home. You can find out through the Nationwide Multistate Licensing System Registry.
The Bottom Line on Qualifying for a Mortgage After a Foreclosure
It is possible to qualify for a mortgage after bankruptcy or foreclosure, but you better be willing to put in the hard work to make it happen. Lenders will be scrupulous in reexamining your finances and making sure you meet the qualifications. They’ll want to see that you’re back on solid ground and can handle monthly payments again when the time comes.