Can You Get a Mortgage After a Bankruptcy or Foreclosure? The Answer May Surprise You…

 

The freedom of purchasing your own home may be for some, the “American Dream.” In 2016, approximately 800,000 people filed in federal courts, this includes Chapter 7, 13 and 11 bankruptcy. While this seems like a lot, the amount has decreased in recent years. And as the economy is slowly recovering from infamous market crash, homeowners are gaining the courage to buy again, but what happens if you’ve filed for bankruptcy?

Read on for a few tips that may save you from potential frustration:

Rebuilding

When it comes to trying to obtain a mortgage soon after a bankruptcy you will want to show that you have some discipline in your financial situation.

  1. Pull your credit report. You will be able to get a free copy of your credit report from Equifax, Experian and TransUnion. You are entitled to one free report from each agency per year. Once you have the report in your hands, check it out, look for any mistakes that you think can be changed. It’s important to get these things corrected ASAP because your credit score will already be suffering due to the bankruptcy. Anywhere you can improve will benefit your score with even the smallest percentage.
  2. Maintain a job. Changing jobs every six months is not fun, nor does it show any type of stability. In the case of someone who has just recently filed for bankruptcy this especially doesn’t show stability, which is what your lender will be looking for. If you are planning to purchase a home, stay in your current job for as long as you can.
  3. Start the rebuilding process. If you are weary about your credit card spending habits, try a secured card with a small limit. This will allow you to manage the payments while building credit. Always make sure your payment is on time or even early for the over-achievers.
  4. Have patience. If you filed for bankruptcy 1-2 years ago, you must wait. If your home was a foreclosure, you must wait three years. This is a hard pill to swallow for some that are anxious to dive into homeownership again but it’s for the better. This time will give you a chance to build up that credit where you need it and lower any DTI (debt-to-income) ratios.
  5. There is a silver lining. If you have suffered a foreclosure, your lender may look to you as being motivated. While you did purchase and lose a home, you are ready to buy another one and do whatever it takes. And if a foreclosure is the only blemish on your credit report it may be easier and quicker to clean up the mess.
  6. Look to the Government. Most lenders are willing and ready to work with government-sponsored programs. FHA and VA loans are under this category. Both loan options provide you with a lower interest rate and less money down. Check with your loan officer to see what you qualify for.
  1. Pay off first. Unfortunately, if your home that was foreclosed on was backed by a government program (FHA, VA), you will be ineligible for another loan until you’ve paid the government the money owed. This factor is disappointing, but paying off current debt will leave you debt-free when it comes time to purchase another home. (We told you there is a silver lining!)
  2. Pre-qualification. For foreclosures, before you start your home search you will want to get the new loan approved by your lender. The worst thing you can do is to get your heart set on something that is not a guarantee, especially a home. Patience during this time is key.
  3. Prepare for a feasible down payment amount. While you are playing the waiting game, you can be saving money to put towards a sizable down payment. It doesn’t have to be anything extreme, but putting more money down initially will lower your monthly mortgage payment, much like money down on a car. Also, you will want to find a home that is well in your budget and nothing to glitz and glam so you can afford the down payment requirements and payments.
  4. Consider a co-signer. If your lender is requiring you to have a co-signer, ask a relative. While this does leave them responsible for any defaulting payments, you must assure them you are ready to take on this responsibility and just need their signature. However, a co-signer should be used as your last-ditch effort, unless required. You would hate to burn bridges and ruin someone’s credit in the process.

Bankruptcies and foreclosure are a huge hit, but you shouldn’t be discouraged with your goal to own a home. This process takes time, but if you continue to work on the straight and narrow, your dream will be at your fingertips in no time.