- Bankruptcy Facts - What You Need to Know
- Mortgage Refinance Can Save Your Home From Foreclosure
- What Happens During a Foreclosure?
- Can Bankruptcy Stop Foreclosure?
- How Long After Foreclosure can I Purchase a Home?
- How to File Bankruptcy
- Which is Worse: Bankruptcy or Foreclosure?
- Take Action When Facing Foreclosure
- Options for Homeowners When Facing Foreclosure
How Long After Foreclosure Can I Purchase a Home?
If you have experienced a foreclosure, you know what it's like to leave your home, pick up the pieces, and make a fresh start. After losing your home, you have probably resolved to work hard and earn enough income to get another mortgage after foreclosure.
Good! You deserve another shot at the American Dream. But you may wonder about your credit score. You know that potential lenders will consider your credit rating and you are concerned that by going through foreclosure you have permanently damaged your chances. You wonder how long after foreclosure you can purchase a home.
What Is a Credit Score?
If you are thinking about buying a home after foreclosure, you first need to understand what your credit score is and how it may factor into a lender's decision.
Your credit history includes all of your credit activities including credit cards, store charge cards, your auto and home loan, and student loans. In order to assess your creditworthiness, most lenders use the credit score system designed by the Fair Isaac Corporation (FICO). It is a sophisticated credit-scoring formula that compiles your credit history and evaluates the risk that you may default on a loan.
FICO scores range between 300 and 850. The better your credit history, the higher your score. A score below 620 is typically considered "sub-prime"."Good" is 620 to 650, and above 720 is seen as "excellent". According to FICO the median score is 723.
A home loan default and foreclosure is a major credit event. Some experts believe that a foreclosure will result in an immediate 250-point drop in your FICO score, and that it will take at least 24 months of perfect credit before a lender will consider you for a reasonable loan rate. A short sale (where your lender agrees to a sale of your house at a loss) may be less damaging.
One factor impacting your credit score after foreclosure is how high your credit score was before the foreclosure. Unfortunately, your credit score probably wasn't that terrific because you were probably late with other payments as well. For example, if after experiencing foreclosure your FICO Score is between 600 and 640, you will expect to pay at least 1.625% over the prevailing interest rate. This means if a borrower with good credit pays 6.5%, your interest rate might be 8.125%.
If your current credit score is 500, then you should expect to pay proportionately more or as much as 3.875% over the prevailing interest rate. The ironclad rule of borrowing is that the lower your credit score, the more you pay. It's that simple.
For Long will a Foreclosure Affect My Credit?
The Fair Credit Reporting Act (FCRA) is the federal law that regulates consumer credit information; there are also state laws. Generally, credit reports cover activity within the past seven years, after which time the information is removed. The exception? A bankruptcy, which stays on your credit report for ten years.
There are no hard and fast rules about how long it takes to get a mortgage and purchase a home after foreclosure. In addition to your credit score, lenders consider other factors including your employment history and current salary, your debt-to-income ratio, and your savings. Generally, the lower your FICO score, the higher loan interest you will pay and the more documentation the lender will require. Homeloans for people after foreclosure are possible, but you need to be willing to pay more and provide evidence of your creditworthiness.
Monitor your credit score! With a foreclosure on your record, you don't need the extra burden of erroneous information dragging down your FICO rating. According to the Fair Credit Reporting Act, every twelve months you have free access to your credit report from each of the three nationwide reporting agencies (Experian, Equifax, and Trans Union). When you request your credit report, be sure to ask for both a credit report and a credit score. And don't be afraid to walk into your local bank and talk to a loan officer-you may be pleasantly surprised. It may take less time than you think to purchase a home after foreclosure.