Applying for a mortgage after a foreclosure
For many people, owning a home is a personal aspiration. So it can be devastating if you are forced to go through a foreclosure process and lose the property you sought to make your own.
People who lose their home to foreclosure may wonder if they'll ever be able to purchase a residence again. Some will be soured on the idea of homeownership altogether, but others may believe that the foreclosure is enough of a black mark on their record that no lender would approve another mortgage for them.
A foreclosure doesn't necessarily preclude you from owning another home. In fact, "boomerang buyers" who previously lost a home and are now returning to the market have made up a substantial share of recent home purchases. However, anyone looking to buy a home after a foreclosure must be patient and diligent with their finances.
You need to wait several years after a foreclosure before a lender will consider providing you with another mortgage. Amy Loftsgordon, writing for the legal site Nolo, says the standard waiting period to qualify for a new loan through Fannie Mae or Freddie Mac after a foreclosure is seven years.
If you're looking to shorten this waiting period, one option is to go for a loan with the Federal Housing Administration. You can apply for an FHA loan once the foreclosure is three years in the past. Margaret Heidenry, writing for Realtor.com, says the waiting period for loans through the Department of Agriculture is also three years, and just two years to apply for a loan backed by the Veterans Administration.
Borrowers can also argue that extenuating circumstances led to the loss of their previous home. These may include unemployment, divorce, or expensive bills related to a health issue. In order to claim extenuating circumstances, you'll need to write a letter to the lender and provide documentation to back up your story.
Of course, you'll also need to reassure the lender that you'll be able to responsibly manage the new mortgage. Phil Scott, writing for the financial site Investopedia, says it helps to stay with your current employer during the application. This helps establish a history of stable employment and shows that you have a reliable source of income.
You'll also want to ensure that your credit report is in good shape. A foreclosure will reduce your credit score considerably, but working to increase it is another way to reassure a lender. A higher credit score will also allow you to qualify for a lower interest rate.
Check with the three major credit bureaus—Equifax, Experian, and TransUnion—to review your credit report. If you notice any errors that might affect your score, contact the bureau and ask them to fix the mistake.
Focus on paying down any outstanding loans, an action which has the doubly beneficial effect of improving your credit and chipping away at the other debts you'll have when you take on the mortgage. Alaya Linton, writing for the financial site The Balance, says decreasing your debt-to-income ratio will also increase your chances of getting approved by a lender.
While you shouldn't try to take on new lines of credit at the same time you're trying to get a mortgage, doing so in the lead-up to your application can help boost your credit score. Scott says one popular option is to get a few credit cards to charge common expenses, paying off the balance each month. You can also take on a smaller loan and try to pay it off as quickly as possible.
Carefully manage your finances in the years before you apply for the new mortgage. Maria Marmion, writing for the Virginia Beach lender Atlantic Bay Mortgage Group, says these steps include keeping low balances on credit cards and staying current on payments. A mix of different types of credit can also improve your credit score.
Make sure you're confident that you can take on a home purchase. Linton says it helps to look for a mortgage that is lower than the amount you might qualify for, since this allows you to budget for maintenance, build up a savings account, and otherwise be prepared for unexpected costs. This will likely mean that you'll have to limit your search to less expensive homes, but doing so will help ensure that you'll be financially secure.
It helps to build up enough savings to be in a strong position when applying for a mortgage. If you're able to contribute 20 percent of the sale price to the down payment, this will help lower your mortgage payments and eliminate private mortgage insurance fees.
Before applying for a loan, you may want to meet with a professional to discuss your situation and options. Heidenry says a mortgage adviser after a foreclosure will let you know what areas you need to focus on to prepare yourself for a home purchase in the future.
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