Survive a Financial Crisis (and Still Get a Home Loan with Bad Credit)

Money Girl answers a listener question about getting a mortgage with bad credit, and gives tips for surviving a financial crisis and rebuilding your credit as quickly as possible.

Laura Adams, MBA
7-minute read
Episode #367

If you manage your credit responsibly, you may be able to get a mortgage before bad marks drop off your credit report.

How to Get a Home Loan With Bad Credit

Many people, like Robin, who lost their homes during the Great Recession are now considering becoming homeowners again. But getting a mortgage can be challenging for any buyer, not to mention those with a foreclosure on their credit history.

Most black marks in your credit file—such as a foreclosure or late payments—typically stay there for 7 years. But the good news is that if you manage your credit responsibly, you may be able to get a mortgage before bad marks drop off your credit report.

See also: Best Mortgage Company to Shop Your Home Loan

To get a home loan after completing foreclosure, you must rebuild your credit and go through a waiting period. Here are general guidelines on waiting periods for different types of mortgage loans:

  • Conventional loans have waiting periods that may vary from 2 to 8 or more years, depending on whether they’re backed by private lenders or government agencies.Those backed by Fannie Mae or Freddie Mac typically require a 7-year waiting period. However, the time may be shortened to 3 years if you can prove that foreclosure occurred due to circumstances beyond your control, such as a job loss, divorce, or medical emergency.

    If you cooperated with your lender and completed a short sale, instead of going into foreclosure, you may only have to wait 2 years to qualify for a conventional mortgage.

    In most cases, you’ll also need a maximum loan-to-value (LTV) ratio of 90%, which means making a down payment of at least 10% of the home’s purchase price. If you can make a larger down payment, such as 25% or more, that may qualify you for an even shorter waiting period.

  • Federal Housing Authority or FHA loans typically require a waiting period of 3 years. But if you can prove that foreclosure occurred due to events outside of your control, it’s shortened to just one year. FHA loans require you to make a down payment of at least 3.5%.

  • Veterans Affairs or VA loans typically require a 2-year waiting period and no down payment, but require you or your spouse be serving in the military, or be a veteran.

My advice for Robin and all prospective home buyers is to make sure you have both a healthy emergency fund and down payment saved up. Additionally, you should be investing at least 10% to 15% for retirement.

If you meet those requirements and are certain that you won’t need to move for at least 5 years, homeownership may be a good choice for you. To consider the pros and cons of renting versus buying, read or listen to Should You Rent or Buy a Home?.

If you’re ready to move forward, the next step is not to call a Realtor or start combing through real estate listings—it’s to get pre-approved for a mortgage.

Reach out to good lenders and home sites such as USAA, Quicken Loans, and Zillow. Explain your situation, and ask what you need to do to get pre-approved for a mortgage. It might take some time, but lenders will help you understand what’s possible, and  how you can become a home owner again.

Get More Money Girl!

For exclusive money tips not covered on the Money Girl podcast, click here and sign up for the free Money Girl Newsletter!

To connect on social media, you’ll find Money Girl on FacebookTwitter, Pinterest, and Google+, or email me at money@quickanddirtytips.com  

Also, if you’re not already subscribed to the Money Girl podcast on iTunes, that’s how most people get the show. Subscribing is always free and makes sure that you’ll get each new weekly episode as soon as it’s published on the web. There’s salso a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

To learn about how to get out of debt, save money, and build wealth, get a copy of my book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite book store in print or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smart phone. You can even download 2 free book chapters at SmartMovesToGrowRich.com!

Images of empty wallet, couple in debt, savings clock, and couple with financial planner courtesy of Shutterstock.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.