The housing crisis was seven years ago and if you had a foreclosure or short sale, enough time may have passed for you to be eligible to buy a home again. However, these boomerang buyers do need to be prepared.
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“It’s all about doing your homework upfront,” says Ray Rodriguez, regional sales manager at TD Bank. “The more educated you can become, the better off you’ll be long term.”
Depending on what led you to be involved in a foreclosure or short sale, you may have some work to do to fix your credit and improve your financial situation.
Lenders want to know if you’re in a financial position for homeownership, and experts are available to provide tips to help you prepare yourself. Here are some listed below:
About 7,000 lenders offer mortgage products, and you may need to talk to a few to find the loan that’s best for you. And each lender has their own approach to underwriting for borrowers too.
“[Lenders] view different circumstances for compensating factors,” says Michael Fratantoni, chief economist at the Mortgage Bankers Association. “When it looks like someone strategically defaulted, [a lender] may not take that person as a customer again. It’s a different narrative when a borrower is in a position who couldn’t pay versus someone who decided not to pay because they found themselves underwater.”
Research Wait Period
Industry guidelines generally require borrowers with a short sale to wait four years from the date of discharge or dismissal before applying for a mortgage again, while those with a foreclosure have to wait seven years. This date is on your credit report that you can access at www.annualcreditreport.com.
While few exceptions are made for foreclosures, borrowers with prior short sales may be eligible for a new mortgage in two years if there were extenuating circumstances. A lender may shorten waiting periods for one-time events, like high medical bills or a prolonged reduction in income, but it’s subjective and lender-specific, says Rodriguez.
Show Steady Income and Savings
Your lender may require a reduced LTV (Loan-to-Value) for your loan, particularly for borrowers with a prior foreclosure. “Putting more money down might be the difference between being approved or not from that lender,” says Fratantoni. “The different dimensions to the process — [being] approved or denied, pricing and the [loan] terms — will change for someone who’s had a foreclosure in their history.”
Lenders will also want to see that you have a steady income. Experts suggest paying off debt so that your DTI (Debt-to-Income) is in the range for you to qualify for a mortgage, which is typically about 36%.
Review Your Credit
Since good credit is key to getting a mortgage, experts suggest understanding what affects your score and ways to improve it, mainly by paying bills on time. Your credit score is affected by whether you were current on your bills despite problems you had with your home. Continuing to make mortgage payments until the short sale, notifying your lender of a hardship or keeping current on your other bills, even though you stopped paying your mortgage, will have made a difference to your credit score. “We look at the total picture of your credit, not just your mortgage,” saysKari Monk, area sales manager at Wells Fargo Home Mortgage.
While most items are omitted from credit reports after seven years, there are steps you can take in the meantime. “You should work to rebuild your credit score and review your credit report, create a plan to pay off debts, investigate debt consolidation options, research working with a credit counseling agency, and pay bills on time,” says Julie Pukas, head of U.S. Bankcard and Merchant Services at TD Bank.
Pay Off Any Deficiencies
If your home was sold for less than what you owed, you may have a deficiency judgment against you in the amount of the difference. Every state treats these differently, and experts suggest knowing whether you need to pay it off before getting another loan.
“These can have a negative impact on your credit,” says Cara Ameer, broker associate and Realtor at Coldwell Banker Vanguard Realty based in Ponte Vedra Beach, Fla. “If there is one, you may want to have an attorney work with you to try to get this waived.”