After experiencing the dreaded foreclosure or bankruptcy, you might worry that mortgage lenders will reject you when you attempt to buy another home. Anxiety over, “Will they think it’ll happen again and not give me a chance?” is perfectly logical. Luckily, you have no need to worry. Buying a home after bankruptcy is still a real possibility.
Foreclosure or Bankruptcy is Not the End of Homeownership
While your foreclosure did mean the loss of your first home, it will not thwart your ability to buy a new one. Mortgage programs today all include guidelines for those who’ve experienced bankruptcy to qualify. There are several ways you can recover from your setback.
Rebuilding Credit
One of the main factors in determining eligibility for mortgage is your credit score. Though it may have taken a mighty hit after your bankruptcy, you can rebuild your credit by opening credit accounts and paying them on time for at least a year.
The longer they’re active, the better. A credit card is the easiest form of credit to maintain, but a diverse credit profile is better on record, so loans personal, student, or car will broaden that profile.
Loan Terms Per Credit Score
As would be expected, loan rates for applicants post-bankruptcy will be higher than usual. To improve your interest rate, rebuilding your credit score is crucial. The general rates per credit score are as follows:
- 500 or lower: 6.5 percent higher than the norm (though with a higher down payment, this could decrease)
- 600 or higher: 1.5 percent higher than normal
Reducing Debt-to-Income Ratio
To lenders, your debt-to-income ratio is just as, if not more, important than your credit score. Unfortunately, many people are so concerned about their credit score that they neglect to notice their debt-to-income.
After dividing your housing ratio (the percentage of your income reserved for housing expenses, such as real estate taxes and homeowner’s insurance) by monthly debt obligations (credit card, student loans, etc.), your percentage should ideally be no more than 28 percent for housing and 36 for debt. Lowering this ratio is most easily achieved by paying off some debt.
Save Money
Yes, this might sound tongue-in-cheek, considering the bankruptcy. However, to buy a new house with certainty, you’ll want a decent savings piled behind you as you commit. Putting down a higher down payment will increase your chances for an approved mortgage, and in general, more savings will show lenders that you’re less of a risk.
Programs That Help Second-Chance Buyers
FHA has a multitude of loans for those dealing with foreclosure, especially thanks to their Back to Work program. This program helps those who have experienced turmoil due to economic issues out of their hands. Aside from foreclosure, those who’ve had a history with Chapter 7 or Chapter 13 bankruptcy are also aided by this program.
How Long Will I Have to Wait Before I Can Buy Again?
Bankruptcy will remain on your credit report for ten years, but your eligibility for a loan will begin within two to four years, though the wait can be as long as seven years, depending on the situation.
Chapter 7
With a Chapter 7 Bankruptcy, waiting periods begin the moment bankruptcy is discharged and vary between the types of loans you can get: two years for both an FHA and VA home loan, three years for a USDA home loan, and four years for a conventional mortgage.
Chapter 13
After a Chapter 13 Bankruptcy, the waiting period is less. Two years or fewer is a common timeframe; however, there is no wait for an FHA loan.
Foreclosure
After foreclosure, you won’t be eligible for an FHA loan for three years (unless you qualify for the Back to Work program, in which case the wait is only one year). For a VA loan, the wait is two years. USDA typically has a three-year waiting period (or one year, if you’ve rebuilt your credit and submitted an underwriter waiver). For a Fannie Mae or Freddie Mac loan, the wait is as long as seven years.
Thankfully, though prospects seem bleak after a foreclosure or bankruptcy, you have not been eliminated from the housing market.
Receiving a mortgage is possible, though you will have to wait, improving your personal finances in the meantime. No matter your situation, there is a solution to fit your circumstance.
This terrific article was submitted by a guest blogger, Kym E. Booke, a Realtor in Las Vegas. Please click on her name for further information or see our Rebuilding Credit and Qualifying for a Mortgage site on christiearkovich.com.