A major credit event for a buyer would be a bankruptcy, foreclosure or a deed in lieu of foreclosure. Such events don’t necessarily mean that these buyers can never buy homes again. A foreclosure or bankruptcy can stay on a credit report for as long as seven years. Foreclosures may dictate as long as a seven-year waiting period before being able to buy a home. Depending on the kind of bankruptcy and the kind of loan being sought, it can be two to six years until another home can be considered after incurring the bankruptcy.
It is important to know that until the lender takes the loan-defaulted property out of the borrower’s name, the clock does not start ticking on these required waiting periods.
Fannie Mae and Freddie Mac have the most stringent waiting periods of four years for these credit offenses. As an alternative, a compromised buyer may want to apply for an FHA or VA loan, under which two to three years must pass prior to any loan approval.
The waiting period for any of these types of loans can serve as time for someone to get their financial house in order so buying a home can again become a reality. The most important thing prospective buyers with these kinds of blemishes on their creditworthiness will have to do is repair their credit and rebuild their credit score.
For your buyers to re-establish their credit, they should open a secured credit card where they will put money down on a card for a line of credit and then pay off the account each month. Any existing debts should be paid down to further raise their credit score. All bills need to be paid on time to show a lender good intent and also build their credit score. FHA loans are great options after a credit event because a credit score of 580 can get a buyer’s foot in the door for a loan approval.
A letter explaining why the bankruptcy, foreclosure or other event occurred should be written and submitted with a mortgage application. This enables the lender to see beyond the numbers when processing an application from a buyer. The letter should also include the steps being taken to prevent a recurrence of such a credit failure.
Having down payment funds will be important for a credit-compromised buyer who wishes to be considered for a new home mortgage. As the buyer works on rebuilding their credit score, they need to start setting aside whatever funds they can for a down payment. If an FHA loan is being sought, a down payment of at least 3.5% of the purchase price will be needed.
As a last resort, a buyer can find someone willing to co-sign on a loan for a new home. This is not always recommended, as it can jeopardize relationships if payment default happens.
Please refer your credit-challenged buyers to me so I can help them with every opportunity to be a homeowner again.