Obtaining a Mortgage After Bankruptcy or Foreclosure

Once bitten by a dog, a person can be shy to offer their hand to another pooch but after some time the real dog-lover will reach out to another furry friend. During the recent economic many American consumer felt the bite of the economy as over 7 million people filed for bankruptcy and more than 20 million were forced into foreclosure. However, after almost a decade of economic growth, many former homeowners are eager to reach out to the banks again to the navigate waters of homeownership.

Before re-entering the home-buying market, consumers should perform simple financial self-checks to insure their home-buying expectations are properly managed.

The 1st thing is Time

Generally it takes 2 to 3 years from filing for bankruptcy or enduring a foreclosure before a bank will want to work with a credit applicant. This time period allows the applicant to demonstrate and sustain proper financial management, which will be reflected by cash on hand, creditor payment history and spending discipline based on post-bankruptcy credit. A requirement of bankruptcy is completion of an approved credit counseling class. These credit counselling classes instruct consumers on the principles of proper financial management and it is these principles upon which the creditor will be award or deny credit.

2nd Check your Credit

It is always a good idea to check your credit annually or even more frequently. After bankruptcy there may be debts that were missed during the bankruptcy court proceedings that can be included after the filing and thus prevent these overlooked debts from delaying any financing opportunities. Checking one’s credit will allow one to determine any erroneous entries or high balances that may be reduced through a payoff before a credit application is completed. In addition, regular examination can assist in managing spending habits and discover any payment discrepancies, as these issues can greatly delay the mortgage process. Through an annual examination of a credit profile a consumer will know where they financially stand and can predict expectations on the outcome of credit applications.

3rd Look in your Wallet

Buying a home carries a cost and if past credit challenges are present, then the home purchase will surely be assessed with a higher risk cost usually reflected in the interest rate, but also in the amount of required down payment. There are some banks and government programs that are geared towards those with past credit challenges but almost always include some out-of-pocket money from the buyer. These cost could range from 3% to 25% of the cost of the property. This money can be from savings, retirement accounts and/or gifts from family but regardless of the source, know the process to access the money and if the financing product will allow the source to be used.

Additionally, if foreclosure or bankruptcy was a past issue then the understanding that maintaining a savings is essential to successful homeownership. There are cost to owning a home from mortgage payment, to taxes, insurance and simple maintenance. Know how much money you have and how much you can realistically afford to purchase a home but do not forget to build in a savings/financial reserves.

4TH Partner

Be prepared to partner with another more credit-stable applicant. Some mortgage programs will allow acceptance of challenged credit, but may require a co-signer or co-applicant. Oftentimes, people turn to family or friends for such purposes, but it is not uncommon to turn to co-workers or small real estate investment groups for help. The same questions asked of the applicant will be required of the co-signer/applicant so prepare the consigner for the detailed and somewhat invasive process. The co-signer or co-applicant can be refinanced off the loan after some time, depending on the loan product and the local real estate market, if a concerns rises about the co-signor being held liable for a debt for an unknown amount of time.

5th Creative Financing

Many returning home-buyers and investors turn to creative financing options to purchase a home. These creative financing options are as numerous as the stars in the sky but generally work with some variance of a home-owner’s willingness to privately finance the home for a period of time while the purchaser further improves their financial profile and finds more traditional financing.

For many the American Dream turned to a nightmare during the Great Recession, but as sure as the sun rises each morning those nightmares are quickly forgotten and with a little preparation the dreaming can re-begin.