Debt Free

You will likely need a mortgage after foreclosure, so how can you get one? After all, your credit will be shot all to hell, and the financial circumstances that led to your foreclosure most likely left other casualties in their wake. Be that as it may, you may not want to be a renter forever, and now is a great time to buy a home. In many markets home prices, driven partly by the very same foreclosure problem, are the lowest they’ve been in years. That spells “buying opportunity” for many.

Well, although you won’t get anywhere near the best interest rates on a mortgage, chances are you’ll still be able to get one, even with a foreclosure on your credit. You will pay between 1.5 to 4 percentage points in interest above what you’d pay if you had good credit. Often it pays to get your credit score up even a few points because it will put you in the next higher credit score range. For more on that, see a post I did a few months back on credit score ranges, and how only a single point in your credit score could save you thousands of dollars.

There are some things you can do to help yourself though. First of all, make sure your credit is only as bad as it needs to be. Clean up your credit report and get rid of any inaccuracies. The foreclosure is going to be the sore thumb on your report though, there’s no denying that. Concentrate on paying every single bill on time from this point forward. You want to rebuild your credit to minimize the interest rate on your next loan.

If you wait 2 years after your foreclosure, you should be able to get an FHA loan. You’ll only need 3% down for most FHA (technically FHA insured) mortgages, but starting in July you will pay more with lower credit scores even with FHA loans. There is an upfront risk mitigation fee and an annual fee for those with poor credit. This will go up as the credit score down. Even if you are backed by the FHA, your credit should be 580 – 600 before you go for an FHA mortgage. Many lenders are still skittish, even with the government’s blessing, ad some won’t even loan on credit scores under 580.

This shows the need to spend your 2 years wisely, rebuilding your credit and saving a down payment. Although you can get an FHA loan with 3% down, including buyer paid closing costs, you’ll want to know that the actual down payment must be only 2.25%, but 3% of the funds in the transaction must be contributed by the buyer. Unlike a conforming mortgage, FHA lenders don’t really care where you got the 3% because they’re not required to. There has been some discussion in congress about raising the down payment for FHA mortgages, possible to 3.5%.

So, if you’ve looked foreclosure in the face, smelled it’s wretched breath, and some out of the whole thing ready to start anew, there is hope for you. You can get a mortgage after you’ve had a foreclosure, and your best bet may be with an FHA backed mortgage.