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June 24, 2015

Buying a Home After Bankruptcy or Foreclosure

With thousands of people negatively affected by the financial downturn of the late 2000’s (remember how horrible the economy was in 2008?) the real estate community had to reassess and reformulate some of their ideas on financing individuals who have a bankruptcy or foreclosure in their past. Once upon a time, a bankruptcy or a foreclosure was the kiss of death if you were looking for a new mortgage. Today, however, it is possible to obtain a new home loan as quickly as two to three years after a bankruptcy or foreclosure. It’s true – buying a house is quite a different proposition than it was only a decade ago. If you’ve been struggling with an economic recovery of your own, don’t lose heart. We’re going to show you some ways to ease back into the housing market and re-establish yourself as a sound credit risk.
  1. Check your credit report after your bankruptcy is discharged.
It isn’t unusual for some creditors to continue to report collection activity and open accounts in default, which can damage your credit score. If a closed or discharged event shows up on your credit report, take immediate steps to have this corrected.
  1. Because three years past your official date of foreclosure is the magic number, be sure that this date is accurate on all searchable records.
Make sure all court foreclosure actions, property tax records, property deeds and your credit report show the same date. Lenders will be free to consider you for a new loan once you’ve reached that all-important milestone, so be sure everyone will be counting back from the same date.
  1. Keep any existing loans current.
Some loans won’t be discharged during a bankruptcy, such as student loans. Be certain that these loans are up to date and paid promptly each month.
  1. Re-establish your credit with a secured card as soon as possible.
Apply for a secured credit card as soon as you can qualify. These cards require you to hold an amount in an account that will match your credit limit. Make several small to moderate purchases each month and pay the bill off in full when due. Never carry a balance. Make sure that the card you select reports this positive activity to at least one of the major credit reporting agencies.
  1. Use this positive record to get your first unsecured credit card.
Once you have at least a few months of solid performance with your secured card, try to get an unsecured card. Many of the higher-interest rate cards will be more willing to give you a chance. Chain stores and department stores are often good candidates. Be sure to pay all balances off in full each month before the due date to ensure that the high interest rate on purchases won’t affect you. As with your secured card, never carry a balance.
  1. Even if the interest rate is high, take out a loan on a big purchase.
A car, furniture or other big ticket item can help you re-establish good credit. Scale back on the sticker price of the item to make sure the payments are affordable with the high interest rate rolled into your monthly payment. Make sure you always make your installment payment on or before the due date, and if possible, pay a little extra each month. This will demonstrate to lenders that you’re back on solid financial footing and have a thorough understanding of how credit can be used to your advantage.
  1. Beware of “zombie debt”.
Collection agencies regularly sell “old” bad debt to other agencies that will report it and try to collect it. Reawakening from the dead, these debts can resurface on your credit report and rapidly undo everything you’ve worked so hard to achieve. Check your reports from all three of the major companies (Equifax, TransUnion and Experian). If the debt is less than seven years old, your best course of action is to work with the new collection agency and make arrangements to satisfy the debt, either immediately or with a payment plan. If a debt is more than seven years old, it’s a good idea to meet with a professional credit counselor to discuss how to best meet this challenge. Either way, your goal is to avoid negative reporting and prevent further damage to your credit. Also be on the lookout for errors on your credit report – they aren’t as uncommon as you might think.
  1. Stay on the job.
Lenders are encouraged if you can establish solidity and performance with an employer. Job-hopping can hurt your chances for a new mortgage. However, if you are currently under-employed and have an opportunity to take a new job that provides significantly more income, be sure to jump at the opportunity - just don’t do it every few months.
  1. Save, save, save!
The bigger the downpayment you have, the more likely a lender is to give you a loan for the balance. We’ll talk more about great tips for saving toward your downpayment in our next post!
  1. Once you’ve re-established a solid credit history, apply for an FHA, Fannie Mae or VA mortgage.
Hard work for two to three years will often open the door for these types of loans. The type of bankruptcy you went through will also affect how long you will have to wait. Some specific guidelines are available here. During interviews, you’ll probably be asked to describe what occurred that caused your previous money troubles. If you made bad decisions, be honest and use specific examples of how you’ve learned from these mistakes. If circumstances beyond your control - such as medical bills - caused your financial woes, outline them concisely but thoroughly, and explain how you’ve worked yourself back to financial health from the brink of disaster. If you have any questions about financing your home after bankruptcy or foreclosure, don’t hesitate to speak with a member of our Sales Team at 912-756-4135 or send us an email. We’re always happy to point you in the right direction!
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