Tuesday, January 22, 2013

Reestablish your Credit and a New Loan May be Possible Sooner than you Think

One of the many fears for homeowners facing foreclosure or having to short sell their home is the fear that they will not be able to qualify for a home loan for many years after either of those processes.  However, Lew Sichelman points out in an article on obtaining a mortgage after bankruptcy or foreclosure writing for the United Feature Syndicate that this might not always be the case.

Seven years is a time period that jumps out in many consumers’ minds.  Even if you have not dealt with foreclosure or bankruptcy, you heard at some point in your life that you have to wait 7 years before getting financing for a house purchase after bankruptcy or foreclosure.  The rules have changed and Sichelman points out that the new wait time may only be three years for some consumers and even less time for others depending on the situation.

Sichelman explains that you can qualify for a mortgage just 24 months after bankruptcy or foreclosure if you can show that your financial woes were due to “extenuating circumstances” that you had no control over.  As Matt Kovach, product development manager at Envoy Mortgage in Houston, points out these must be “life-changing events that made it impossible” to continue making your payments.  Job loss, serious illness and death qualify as “extenuating circumstances” but divorce, business failure or simply taking on too much debt do not qualify.

That is the first part of the test in obtaining new credit after the required waiting period.  You have to then re-establish a clean credit report to obtain new financing.  Part of this process is showing potential lenders that you learned from your mistakes or “life-changing event” and are now capable of making payments and handling the responsibilities associated with new debt.  Kovach says it quite accurately and succinctly, “Poor credit is not a good indication you’ve learned from your mistakes.”

You may think that the best thing to do is go to a strict cash only policy.  Although this might help you reign in spending, it does not help reestablish credit.  Some lenders might take into consideration cash payments such as rent, utility bills and cellphone payments in building a credit report, but it will be more difficult to qualify.

This blog is not meant to give you a green light to go ahead and declare bankruptcy or foreclosure in hopes of speeding up the process of eventually getting a new loan down the road.  These are major financial decisions that must be discussed with experienced bankruptcy or foreclosure attorneys in order to determine the best financial path for your specific situation.  If you cannot point to “extenuating circumstances” then you might be looking at a longer waiting period which might mean you need to reexamine your current situation to determine what to do.

Government backed loans such as VA and FHA loans typically have shorter waiting periods.  The VA’s rules do not address short sales so you could potentially short sell your home and obtain a VA backed loan practically right away.  However as pointed out earlier, you must re-establish favorable credit to qualify.

FHA loans require a three year waiting period for you if you went through a short sale, foreclosure or deed in lieu of foreclosure, but “extenuating circumstances” could help shorten the waiting period.

Various lenders and government backed loan issuers have more detailed guidelines on how to reestablish credit so you can shorten your waiting period.  It is important to keep this in mind and remember that you do not need to give up on the American Dream of owning your own home simply because you experienced a financial hardship that led to a derogatory mark on your credit history.

See Our Related Blog Posts:
What is a Deed in Lieu of Foreclosure?
Underwater Property Owners Step Away from the Cliff

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