Buying a House after Foreclosure

Buying a house after foreclosure can be difficult. Your foreclosure will remain on your credit reports for seven years, lowering your credit score. This, in turns, makes it harder for you to take out loans and find a property owner who would be willing to sell to you. Even if you can qualify for a mortgage, you will not be able to qualify for lower rates and more lenient conditions. But, given time, you will be able to rebuild your credit and expand your mortgage options. So long as you use your money carefully and avoid common traps and scams, you should emerge as good, if not better, than before.

Rebuilding Your Credit

Your credit will not fully recover until seven years pass and your foreclosure is wiped from your record. Until that happens, you can take a few steps to improve your credit score. They include:

  • Pay your bills on time - this is the most important step. It will show banks and mortgage lenders that you have learned from your foreclosure and that you are willing to take steps to better manage your finances. However, it will usually take at least a year before this will have any noticeable effect on your credit score. Try your best not to miss so much as a single payment. Otherwise, you will be back right where you started.
  • Avoid new debts - while paying your bills on time is important, it should not result in more debt If you can't make payments out of your own pocket, chances are pretty good that you would not be able repay any more loans. Focus on repaying the existing loans with whatever funds you have.
  • Get yourself a credit card - to demonstrate that you can handle credit, you can get a credit card with lower-than-usual credit score requirements. They include department store cards, gas cards, secured credit cards and credit cards from your local neighborhood/town/village banks. Such credit cards won't let you use lots of money, and their terms can be quite stringent, but if you manage to use them without falling behind on payments, your credit score will improve quite a bit.

Consider FHA-backed Mortgage Loans

Three years after your foreclosure, you become eligible for an FHA-backed mortgage loan. They are private loans are insured by the Federal Housing Authority, which allows lenders to give you more generous terms and lower their credit score requirements. It is an option worth considering if, by that point, your credit still isn't good enough to quality for a conventional mortgage loan. With FHA-backed mortgage loan, you will be able to borrow up to 97% of the home's value. Once you pay back 78% of your FHA-backed loan, you will no longer have to pay premiums.

That said, FHA loans do come with certain strict requirements. Your credit score can't be lower than 620, you can't owe any tax lien payments and you must be able to prove that you had a steady job with steady income for the past two years.

Be Weary of Rent-to-Own Contracts

When your credit history is bad, you may be tempted to sign a rent-to-own contract. Simply put, the contract allow you to live on a property as a renter while your rental payments are partially used towards the purchase of the property in question. While this isn't necessarily a bad idea, you should carefully read every part of the contract before signing it. Otherwise, you may be stuck paying rent you can't afford towards a purchase that isn't even guaranteed.