Money Girl answers a reader question about the length of time between foreclosure and buying a new home.
A reader name Joseph F. asks:
"I just finished your book and it was so informative! Now I’m wondering how long to wait before buying a home after my foreclosure. I make about $40,000 a year, have about $10,000 in savings, and live well below my means. What do you think?"
Whether you stopped paying your mortgage on purpose as a “strategic default,” or due to a financial hardship, having a foreclosure on your credit history is very damaging. That’s because it stays on your credit report for 7 years from the foreclosure filing date.
Though a foreclosure will suppress your credit scores, they can bounce back if you manage your credit wisely. Paying bills on time and using a regular or secured credit card that you pay in full each month are the best ways to get your credit back on track as quickly as possible.
As you accumulate more current credit transactions that are positive, they start to overshadow the negative ones from your past. As your foreclosure ages, it won’t be ignored, but will be less of a damper on your credit if you make it a habit to pay financial obligations on time and never run up high credit card balances.
Additionally, credit scores are just one piece of information that a home lender uses to evaluate potential borrowers. They also look at how much you earn, your job stability, how much savings you have, and various financial ratios, like your percentage of debt to income.
A home lender may also penalize you for having walked away from the mortgage on a foreclosed home (if that was the case)—versus having been forced to stop making payments due to a situation you couldn’t control, like a job loss or a medical crisis.
If you can make a large down payment on a home—like 30% or more—that can sway a lender who’s on the fence about your credit worthiness. Receiving more upfront cash reduces a lender’s potential liability if you default and require them to foreclose.
A good rule of thumb is to wait at least 2 years before trying to buy a home after a foreclosure. That’s enough time for your credit scores to show some improvement—if your overall financial situation is the same or better.
But don’t let your home buying expectations get too high! The 2-year mark is when you should start approaching potential lenders to evaluate your situation—not when you should start shopping for a home without a mortgage pre-approval in hand.
For 3 smart strategies to raise your credit score fast, be sure to download the Credit Score Survival Kit. This free multimedia resource will help you fast-track your credit success.
To learn much more about buying real estate and getting the best mortgage, be sure to grab a copy of Money Girl’s Smart Moves to Grow Rich. Get it from your favorite book retailer as a paperback or ebook.
Foreclosure photo courtesy of Shutterstock.