Photo (cc) by JefferyTurner
There’s a long list of ramifications for having your home go into foreclosure.
But at the top of that list is the blow to your credit rating, and the inevitable question: “Will I ever be able to buy a house again?”
The good news is that, yes, you can qualify for a mortgage to buy a new home after a foreclosure. The bad news is that it’s going to take a while. That’s because most home purchases depend on the quality of your credit score.
Typically, after a foreclosure, your credit score drops by 100 to 200 points from the foreclosure alone, according to FICO, the company behind most credit scores. (Here’s a story we did showing how various credit issues affect scores.) While banks and lenders will still do business with borrowers with a credit rating in the 600s, that kind of a drop, especially when compounded by late payments and other potential credit issues, will put most foreclosure victims out of the home mortgage market.
But all is far from lost. You can bring your credit score back up 200 points over the course of a few years – if you’re diligent about paying every bill and keeping a lid on your credit card use. Creditors recognize that a foreclosure is a single event – albeit a big one – and consequently they take a wider look at your credit history before making a lending decision.
Let’s take a look at the “wait-time” for an FHA-insured loan in two of the toughest financial situations: bankruptcy and foreclosure.
- Chapter 13 Bankruptcy (The court establishes a plan for you to repay at least some of your debts). There must be 12 consecutive months of on-time payments on all accounts (including utilities, cell phones, etc.) from the filing of the Chapter 13 bankruptcy.
- Chapter 7 Bankruptcy (The court wipes out your debts). There must be 24 months of perfect credit from the date of a Chapter 7 bankruptcy discharge.
- Foreclosure There must be three years of perfect credit from the date of the foreclosure.
That’s for FHA-backed loans, which will probably be both easiest to get and offer the best rates and terms. For conventional loans (non-FHA-insured) the waiting period is less certain, but tends to be around four years.
Why is a person who files bankruptcy able to get an FHA-backed mortgage before one who has been through a foreclosure? Well, keep in mind that a Chapter 7 bankruptcy wipes out all debts, while a foreclosure doesn’t. In addition, you can only file for personal bankruptcy every seven years. There’s no such limit with foreclosure. So, while a bankruptcy filer may seem at first blush to be less attractive to a lender, the opposite is actually true.
Bottom line? If you’ve suffered a foreclosure, don’t lose hope. You’ll need to pick yourself up, dust yourself off, and begin the slow process of rebuilding your credit the same way you did when you first started out (here’s a recent story we did on that), paying your bills in full and on time.
If you can manage that, you might be back in your own home sooner than you think.