If you’ve ended up in foreclosure, you’re not alone. Many former homeowners have traveled the same rocky path. A foreclosure affects many facets of your finances, including getting approved for a mortgage loan for a different home. Here’s what you need to know about how your past foreclosure impacts your chances of landing a mortgage. In a nutshell, there’s bad news and good news.
Foreclosures Affect Your Credit Score
The bad news. Ending up in foreclosure doesn’t happen overnight, so chances are good that your credit score was already decreasing as soon as your first late payment hit your credit report. Once the foreclosure shows up on your credit report, your score will drop dramatically. We’ve seen scores drop 200 points because of a foreclosure.
The single biggest factor used in calculating your credit score is your payment history. Foreclosures happen because homeowners are no longer meeting their mortgage payments. A recent foreclosure is going to have a bigger effect on your credit score, which is a key component of securing a mortgage loan.
The good news. Credit scores change over time, and you aren’t stuck with a bad score forever. A person with a foreclosure can rebuild their credit by making other payments on time, keeping credit card debt low, and applying for credit sparingly.
The Time After Your Foreclosure Is Important
The bad news. As we mentioned already, a foreclosure will tank your credit score, making you look risky to lenders. Hopeful borrowers with a recent foreclosure won’t be able to qualify for a house for at least a few years.
The good news. Putting work into your finances will slowly prepare you to leave your foreclosure behind you and move forward with a new home and mortgage. After your foreclosure, you need to be diligent about paying your creditors on time. These payments will add positive history every month to your credit report. Manage your revolving debt wisely, too. Avoid overspending on your credit cards and, if you do charge on them, pay them off every month on time. Stay on top of your credit report by looking at it every three months.
These positive moves will start rebuilding your credit score, so you can get a mortgage after foreclosure.
The bad news. If your foreclosure was the result of getting into too much debt or not managing your money well, the foreclosure may impact your ability to qualify for a mortgage for several years. Even if you get on the right track, budget well, and pay your bills on time, you’re probably looking at a minimum of four years before you can tackle homeownership again. In some cases, you may need to wait seven years.
The good news. When it comes to foreclosures and how they impact your chances of getting a mortgage, part of it depends on the circumstances that caused your foreclosure. In some instances, you can use “extenuating circumstances” as the reason for your foreclosure. Some examples of extenuating circumstances are divorce, serious illness, or suddenly losing your job. If you have extenuating circumstances for your foreclosure, you might be able to move past it faster than if you have an average foreclosure.
Your Post-Foreclosure Mortgage May Depend on the Type of Mortgage Loan
The bad news. There are many loan types lenders can offer to borrowers. Some of them fit perfectly for some people and not at all for others. If you have a foreclosure in your credit history, you’ll have a much shorter list of options than borrowers with a spotless credit history.
The good news. Over time, your foreclosure will be viewed as less risky by lenders. In addition, some loan programs forgive foreclosures faster than others. For example, if you are eligible for a VA loan, you might only need to wait two years after your foreclosure to land a mortgage. An FHA loan only requires a person to be three years out from their foreclosure. These options can help you get approved for a new mortgage loan much quicker than other, more traditional loan programs.
Talk to Your Lender
Everyone has their own specific story. A savvy mortgage originator can look at your unique situation and your finances and advise you of your options. While your foreclosure may be too recent to be able to get a mortgage loan, you can at least get an idea of how long you need to wait, and what you should be doing to get mortgage-ready.
Millions of people have a foreclosure in their history. Yes, it’s a difficult and frustrating situation, but it doesn’t define you or your future forever. By managing your finances, budgeting, and planning, you’ll hopefully be able to qualify for a new mortgage loan sooner than you think.