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Mortgage Loans

Need a Second Chance? Buying a House after Foreclosure

A home foreclosure can be a painful, traumatic experience. Even if it happens for reasons beyond your control like an illness, job loss or divorce, you might doubt your ability to own again.

But while foreclosures are devastating, losing your house isn't the end of the world. And going through a foreclosure certainly doesn’t mean that you’ll never qualify for another mortgage loan. The truth is, you might be able to qualify for a new mortgage in as little as three years. So, if your future plans include ownership, here’s how to bounce back and buy a house after foreclosure.


1. Build your credit

Since a foreclosure can drop your credit score by as much as 200 to 300 points, make rebuilding your credit history a priority over the next few years. You can’t repair your score overnight. But you will see gradual improvements in your rating with responsible credit habits. 

Make sure you pay your bills on time every month. This includes auto loans, utilities, insurance payments, credit card payments and student loans. The less negative activity on your credit report the better. Paying off debts can also give your score a boost, so don’t be quick to pull out your credit card for purchases. If you do use credit, pay off balances in full every month. Also, check your credit reports for errors at least once a year. Negative items reported in error can drop your score and make it harder to get a home loan.

Qualifying for another mortgage will likely require a minimum credit score of 620 for a conventional loan, and a minimum score of 580 for an FHA loan. To receive the most favorable interest rate, however, aim for a credit score of at least 740.


2. Plan for a bigger down payment

While getting another mortgage after foreclosure is doable, make sure you prepare for a higher down payment. Before the foreclosure, you may have purchased your home with only 3.5% or 5% down. Now that you have a recent foreclosure on your record, you’re considered a higher-risk borrower. And unfortunately, this comes with a price—mostly in the form of a 10% down payment. So, if you’re thinking about buying a $200,000 property, you might have to save a minimum of $20,000 for your down payment (and don’t forget there will be additional closing costs that you’ll need to pay as well). 

Coming up with this type of cash is challenging. To help you save money, consider renting a home that’s considerably less than what you can actually afford, and then put the difference into savings. Other options include getting a second job, starting a side business and saving any surprise money you receive, such as tax returns or work bonuses.


3. Maintain a cash savings after buying

Along with saving for a down payment, make sure you're saving enough to maintain a cash reserve after buying another home. The worst thing you can do is drain your savings on a home purchase. Instead, keep a couple of month’s worth of mortgage payments in savings. If you lose your job or can't work for other reasons, your cash reserve can cover your mortgage payments until you're back on your feet.


4. Speak with a mortgage expert

Speaking with a Cherry Creek Mortgage home loan expert can also help you prepare for homeownership after a foreclosure. We can discuss mortgage programs available to you, offer suggestions to help you qualify for a better rate, and evaluate your income, credit and assets to determine how much you’re able to spend on a home purchase. 


Bottom Line

A home contributes largely to your net worth, so don’t let the past or fear keep you on the sidelines. Give us a call to learn about loan programs. We offer a wide range of financing opportunities and we’ll work hard to find a product that fits your needs.