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.
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.
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.
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