Can You Buy a Home if You Have a Recent Bankruptcy or Foreclosure?
By Gina PogolMortgage Credit Problems Columnist
Katherine Asks: Dear Gina, My husband and I went through some tough financial times. He was a real estate developer and we had many rentals. We ended up with a slew of foreclosures on the rental properties and a Chapter 7 bankruptcy, which was discharged just over a year ago. We moved out of state, got back on our feet, and have steady employment and 20% to put down. We found a house that is an absolute steal--the owners are heirs and just want to dump it fast. We love the property, but can we get a mortgage?
Gina Says:
Dear Katherine,
I'm sorry about your financial troubles but congratulate you on digging your way out and starting over. Ordinarily I recommend that people with bad credit start with FHA when looking for a mortgage. FHA home loans offer more lenient underwriting. For those with serious credit damage, FHA may be the best way to go even if you have 20% to put down. A conventional lender will not approve those with recent serious credit issues.
FHA After Bankruptcy or Foreclosure
However, FHA generally requires at least two years' distance between you and a bankruptcy and three years following a foreclosure. The exception is if you can convince an underwriter that there are extensive mitigating circumstances that warrant special consideration, for example a medical crisis or job loss that was not your fault and couldn't have been prevented. You also have to show that you have resolved the problem, taken steps to be sure it won't happen again, and re-established credit. In that case, with a substantial down payment and sufficient income, you could possibly squeak out an approval before the "official" limits--as early as 12 months following a bankruptcy. In this case, though, you also have multiple foreclosures. That probably rules out FHA as an option right now.
Seller Financing for People with Bad Credit
Many markets in the U.S. are highly distressed, and sellers may be motivated and able to either carry some or all of the financing. If you can establish some trust and credibility with your seller, this may be an option for you. Asking for a fairly short term, say two years, is preferable. Few sellers want to commit to a 30 year fixed rate loan.Then keep your nose clean and prepare to refinance when the seller's mortgage expires.
Consider a Lease Option
Another possibility is getting a lease option. This requires a substantial fee, which you lose if you break any terms of the lease. But part of your rent payments go toward your down payment and you can close the deal when your credit has improved to the point that financing is feasible. A little caution: Many, many lease options don't end up with a purchase. There are scammers out there who write leases with nearly impossible conditions--the object being to force you into breaking the lease and forfeiting your deposits. For best results, have a real estate attorney or very, very good real estate agent review your documents before committing to anything.
Bad Credit Lenders May Be a Good Choice if the Deal Is Good Enough
Bad credit lenders are still out there, and may be willing to help, especially with your 20% down payment. Keep in mind the costs will be high, several points upfront, with an interest rate several percentage points higher than what the prime borrowers are being offered. However, if you feel the house is so well-priced that it would cost more NOT to buy it, go ahead by all means and investigate bad credit lenders. One of them may be able to get you that home you want so badly.
Thanks for writing and good luck with your purchase,
Gina
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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