If you lost your home in a foreclosure, you probably think you’ll never buy a home again. Luckily, the underwriting rules aren’t that tough. You can get a home with FHA financing after just three years of waiting. While three years might seem like a lot, it will give you time to get yourself back on track.
Just because the FHA says you can get a loan after three years, you still have to qualify for it. Keep reading to find out what you have to do to buy a home.
Fix Your Credit
Your credit score probably took a big hit when you lost your home. Since you couldn’t keep up with your home payments, chances are that you didn’t keep up with other bills either. Now is a great time to pull your free credit report and see what you have to fix.
Go through the report line by line and look at which accounts have negative information still reporting. Are you still past due on credit cards or installment loans? Start getting them current as fast as you can. Is there information on the report that doesn’t belong to you or that is incorrect? Write to the credit bureaus and get the information fixed right away.
If you lost everything and are starting from scratch, you’ll need to build credit. Start with a secured credit card, as that’s usually the easiest to get. Once you have that card for a while and pay on it regularly, apply for an unsecured credit card or installment loan. Just keep things active on your credit report so that your score has no choice but to go up.
Establish a Housing History
Even though you don’t have a mortgage anymore, you have to live somewhere. If you’ve picked up the pieces and aren’t living with mom and dad anymore, establish a positive rent history somewhere. You can use that rent history to your advantage when you go to apply for an FHA loan. Housing history speaks volumes when you are trying to get a mortgage.
If you aren’t officially renting an apartment or home, but pay a relative rent, document it. You can give the FHA lender copies of your last 12 months’ of checks to prove that you made your payments on time. This shows that you are used to making housing payments and can keep up with them now.
Make Sure you Have a Good Debt Ratio
The FHA has flexible debt ratio guidelines, but that doesn’t mean you should have the highest debt ratio possible. Remember, you are trying to overcome the negativity of a foreclosure. The lower your debt ratio is now, the lower the risk of default you show the lender.
The FHA allows a 31% front-end ratio and a 41% back-end ratio. See what you can do to make those ratios as low as possible. If you can pay off some of your debt, do so. This way you can enter homeownership with a clean slate this time around.
Have Stable Employment
Lenders want consistency, especially if you lost your home in foreclosure before. If you have a 2-year history at the same job, you’ll show the lender reliability and consistency. They want to know that you are going to stay at the same job and that your income is reliable.
Remember, the lender is entering this transaction with a little trepidation. They aren’t sure if you are going to default again. Hopefully you recovered and it won’t happen again, but they want as many compensating factors as possible to ensure that. One such factor is stable employment. If you went back to school or took any type of training to excel in your position or industry, make sure you make that known to the lender, as that’s another compensating factor.
Put Your Own Money Down
Even though FHA loans allow you to accept gift funds for your down payment, this time it’s a good idea to use your own money. When you have your own 3.5% invested, the lender knows that you will do what you can to make your payments. If you default, you stand to lose your own 3.5% plus any payments you’ve made.
If you accept gift funds, the urgency isn’t there as much. You aren’t going to lose your own money if you lose the home. That sense of security won’t be there for the lender if you accept gift funds.
The FHA loan has some of the most flexible guidelines, even after you’ve lost your home in a foreclosure. Make sure you maximize your qualifying factors so that you can get the most out of your loan. Also, make sure you shop around as not every lender will be willing to give you a loan even after three years after your foreclosure.