Rebuilding

Qualifying for a mortgage after foreclosure

It’s been about a year and a half since our Chapter 7 bankruptcy discharge, and about eight months since the final foreclosure sale of our home. We’re living in a rental house, but we are beginning to think about buying a home of our own again. If we do this, we are determined to do it sustainably this time, so we will buy less house than we can afford, and put a significant amount down so we’re not underwater right from the start.

The rules around getting a mortgage after foreclosure and/or bankruptcy vary, but most are focused on an initial waiting period. For bankruptcy alone, this period is typically 2-4 years. In our case, the foreclosure is a bigger difficulty than the bankruptcy, since it took almost a year longer to complete. Traditional lenders won’t qualify buyers for a mortgage until 3-7 years post-foreclosure, due to guidelines the lenders must follow in order to sell their loans to purchasers. Even though our mortgage was included in the bankruptcy, the guidelines are pretty specific that the waiting period begins after the actual foreclosure sale, not the bankruptcy discharge date.

For FHA or USDA loans, borrowers need to wait three years after a foreclosure, while Fannie Mae and Freddie Mac require a 7-year wait. Fannie Mae, however, reduces the wait to three years if you can show that the foreclosure was due to a sudden reduction in income beyond your control, such as our job layoff — and you have re-established good credit since the foreclosure. They will offer the same reduction if you show a catastrophic increase in financial obligations due to medical bills. The USDA and the VA also consider unemployment as acceptable extenuating circumstances. The FHA has a similar waiver for other extenuating circumstances, but for some reason, unemployment doesn’t count. In any event, at a minimum, we will probably need to wait 3 years post-foreclosure, which puts us into the fall of 2014.

That seems like a long wait, when I think about the things I want to do NOW like paint rooms in the colors I choose, or plant longterm gardens. On the other hand, this provides a good structure around our savings and credit rebuilding plan. It also gives us some time to bring our credit scores back up to where they were before all this happened, and to decide where we want to live. We have a good idea of how much we want to spend on our next house, and we’re working toward a down payment of at least 20%. In the meantime, we’re rebuilding credit by continuing to pay all of our bills on time and paying down our remaining debt. For example, Tony has just a few payments left on his truck, and then that money will go into savings.

I also recently got my first post-Chapter 7 credit card. After the 0% introductory period, the interest rate is a ridiculous 22.9%, but I don’t ever carry a balance so it doesn’t matter. I use the card only to buy gas, and then pay it off in full every month. It’s a little bit of a pain in the ass — I could just use my debit card for gas and have one less monthly bill to pay. But by the time we’re ready to apply for a mortgage in a few years, between the credit card, my student loan and my car loan, I will have established a post-bankruptcy pattern of responsibly using and paying off credit.

 

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