Buying a Home After Foreclosure

Having a home foreclosed by a lender is a horrible feeling. Even worse, foreclosures are sometimes uncontrollable. For example, sudden job loss or a health crisis may result in long-term unemployment. Because the majority of the population is without a cash reserve or emergency savings account, they default on their mortgage loan during a crisis. Some mortgage loans include a forbearance agreement, which allows borrowers to stop making payments for a specific time frame. During this time, the lender will not exercise their legal right to reclaim the property. Unfortunately, many home loans do not include this agreement. Hence, once the borrower is 90 days past due, the mortgage lender begins the foreclosure process.

Once a home is foreclosed, the idea of buying another home seems out of reach. Yet, there are numerous incidents where previous homeowners have been able purchase another home. All it takes is regaining control of your finances and re-establishing credit. Consider the following steps for getting approved for a home loan after a foreclosure.

1. Build a Good Credit History – Having a home foreclosed will leave a negative mark on your credit report. Until the delinquency is removed, every mortgage lender reviewing your credit report will be hesitant to approve your loan request. On the other hand, if your credit has improved significantly since the foreclosure, and you have opened new credit accounts, and maintain regular payments, this puts mortgage lenders at ease. Even though a foreclosure can make you feel depressed, it is important to quickly change your state of mind, and begin taking the necessary measures to boost your low credit rating.

2. Do Not Rush – Some people want to buy a home immediately following a foreclosure. Although buying this soon is possible, your choice of mortgage lenders is limited. Moreover, lenders eager to approve a loan request will charge excessive rates and fees for the loan. The average interest rate on a home loan is between 6.2 and 6.8 percent. Persons with a recent foreclosure could pay two or three percent points above normal. To avoid a much higher interest rate, wait at least 12 months before buying. If you can wait longer, postpone financing a home for 24 months. This usually provides enough time to rebuild a solid credit history.

3. Compare Lenders – If trying to finance a home shortly after having a home foreclosed, sub prime or high risk lenders are your only option. These lenders will charge a higher interest rate on the loan. Still, homebuyers must shop around to avoid dishonest mortgage lenders. Using a mortgage broker, request quotes from up to four different sub prime or high risk lenders.

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