Will you be able to apply and get approval for a home loan once you have foreclosure in your credit records? The straight answer is, yes. However, it will not be as easy as you thought it would be.
A lot of American Dreams were shattered a few years back when the housing market crashed. As people lost their jobs, they also lost the ability to pay for their usual financial obligations. Part of this is their ability to pay off their mortgages.
Foreclosure became a reality for a lot of homeowners across the country. One of the pitfalls of being financially broke is that you lose everything that you worked so hard to achieve. Usually, your home is one of the first that has to go. It is a difficult possession to let go of but being the most expensive of all our expenses, it is a necessary sacrifice.
When you cannot pay for your home loan anymore, you can lose your home to foreclosure.
Foreclosure damages to your mortgage chances
Foreclosure is the process by which your home is repossessed by the lender as collateral for the loan that you can no longer pay back. When this happens, you will not longer have ownership for the home and it will be sold to someone else through a bidding process (at least this is the usual practice).
StatisticBrain.com provide the following foreclosure statistics from 2007 to 2011.
2007 – 2,203,295 (growth of 987,991 or 81.2% from 2006)
2008 – 3,019,482 (growth of 816,187 or 37.0%)
2009 – 3,457,643 (growth of 438,161 or 14.5%)
2010 – 3,843,548 (growth of 385,905 or 11.1%)
2011 – 3,920,418 (growth of 76,870 or 1.9%)
These statistics show that during the height of the job loss in 2007 and 2008, foreclosures were quite rampant. With the inability to pay off a home loan, the risk of foreclosure is high.
When your home goes into this process of repossession, it starts a lot of damages in your life. Here are some of the things that you need to expect when you are facing foreclosure.
New living conditions. The most immediate concern for you right now is your new home. For most of people, they will have to rent their own place. You need to be able to pay the rental deposit that is the normal requirement of landlords. Not only that, you need to be able to show a good credit report – which at this point will be difficult because of the foreclosure.
Lower credit score. Speaking or credit reports, this will also take a hit when your home is repossessed. As previously mentioned, this signifies your inability to pay off the home loan and that says a lot about how uncreditworthy you are.
Long time in between mortgages. While you can still be eligible for a loan, there are rules that will keep you from getting a new one immediately. You will have to wait a couple of years before you are apply again – around 3-5 years. The length will depend on the reason for the inability to pay the home loan. For instance, those who lost their jobs will be given lesser time in between loan applications.
Foreclosures become a public record. Everyone will know that your property was foreclosed and it might be a problem when you look for another work – especially when your career is related to finance. You may have to explain your side before you are hired.
Tax bills can knock on your door. Any amount from the original loan that you cannot pay for after the foreclosure process can be taxed by the government – so you still have to pay for that.
While foreclosure is sometimes unavoidable, you need to learn your lesson so you will not go through this again. You have to remember all the damages that it will cost you. Do not let yourself be ruined again financially.
How to increase your chances to get a mortgage loan
It is possible to increase your chances to get another home loan. Since there are a couple of years in between the foreclosure and your new mortgage application, you have the time to fix the mess that it made.
There are many tips to guarantee a loan approval and they are concentrated on improving your credit report.
Pay down your debts. One of the factors keeping your credit score low is your debt amount. Make sure you pay off your debts so the debt level goes down. You want to lower your debt to income ratio to make yourself more eligible for a home loan approval.
Pay on time. Apart from paying down what you owe, it is important for you to put in good entries in your credit report. On time payments is one of the entries that will improve your creditworthiness.
Do not stop taking in debt. This is very tricky. You need to keep yourself in debt so that you can show that you have the ability to pay it back. The lender will not care about the amount as long as you display good payment behavior. So feel free to use your credit card every now and then but make sure you pay it back before the end of the month (or the due date). That way, you can stay out of the card’s interest rate and finance charges while keeping your credit report happy.
Prepare the requirements needed for your next mortgage loan. There are revisions set to be implemented in 2014 about home loan applications. It is known as the Ability to Repay rule and you have to familiarize yourself with it. You can read about how this law will affect you as a consumer through ConsumerFinance.gov.
You need to prove to your next lender that you are capable of paying back your loan this time.
Avoid foreclosure this time
When you are approved of the new home loan, you have to make sure that you will no longer end up in foreclosure. Based on the FDIC.gov, they identified the following as the reasons leading up to the foreclosure of a home.
32% loss of job
25% health crisis
Do not have savings, no credit and even extended families have very limited resources.
Have gone through a couple of refinancings.
Source: Homeownership Preservation Foundation data (60,000 homeowners), http://www.fdic.gov/about/comein/files/foreclosure_statistics.pdf
To help you stay away from loan problems, you should consider doing the following:
Buy a home that you need. Some people are told that they can buy a home that is worth $1 million and they go ahead and purchase a big house. This is not the right mentality. Purchase a home that you need – even if you are qualified to purchase a more expensive one.
Build up your savings. Since you did not borrow up to your limit, your income should have enough room for your savings. You need to build up your emergency fund so that another job loss will not cripple your credit payments.
Save up for a bigger down payment. When you can pay a bigger down on your home loan, your balance will be smaller and in essence, it will have a smaller interest.
You should also know that there are alternatives to a home loan that you can look into – in case it is more difficult to get financing the traditional way. You need to know your options so that you can be a homeowner once more – without your past foreclosure getting in the way.