©Farenxdesig - flickr

©Farenxdesig – flickr

One of the reasons that current homeowners may be so determined to keep a house out of foreclosure is the fear that, if they default on their mortgage, they will never be able to get a new home again, or at least not for a decade while the foreclosure is on their credit report. But this inability to qualify for a new loan after a foreclosure is simply a myth, and there are a number of ways that homeowners can obtain another mortgage. While it is not easy to do, foreclosure victims do not have to worry about being completely locked out of the banking system just for losing a home.

Immediately after a foreclosure, homeowners can qualify for a new loan to purchase a house, if they are willing to make the required down payment. Typically, they will have to go to a specialized foreclosure lender, hard money lender, or subprime lender that is still in business, and offer to put down at least 30-35% of the purchase price. The mortgage company, because of the large down payment, will discount the borrowers’ poor credit because the bank will be quite protected by the large equity stake in the property. If the homeowners go into foreclosure again, the lender will eat up the equity through interest and fees, buy the house at a sheriff sale, and sell it on the open market for a profit.

But most families, just after they have lost a home to foreclosure, will not have a lot of money to use as a down payment for another house purchase. So they may have to wait and do some work in the meantime in order to qualify for a mortgage. Borrowers can obtain a new loan within a couple of years if they work on repairing their credit, save up a reasonable down payment, and have a stable source of income. Cleaning up the credit report will give them a much better chance of qualifying for a traditional loan from a bank based on credit, regardless of the previous foreclosure. It will be important to get rid of old account information and inquiries, and pay down any other debt, as well as establish on time payment histories with other cards and open lines.

Within half a decade, most previous homeowners will be able to qualify for a new mortgage, even if they do not do anything extra to work on their credit. By that time, most of the negative information from the time of the foreclosure will be far enough in the past not to have a huge impact on a credit score. Banks will still want to see that potential borrowers have used credit wisely recently, but loan applicants do not have to do much extra work on credit repair. However, having a down payment will always be important in qualifying for a mortgage after failing to save a home from foreclosure, although it will not have to be 35% or more.

The fear of losing a home is often compounded by the fear of not being able to rent an apartment or qualify for a new mortgage ever again. But borrowers, even if they have to give up their plans to stop foreclosure on the current property, may find it easier than they at first thought possible to become homeowners again, with just a little extra work on their credit and a proper savings program. And even with very little work put into credit repair, most banks will be willing to make a reasonable loan after a period of five years to people who lost a home to foreclosure, as long as their use of credit has been positive since then.

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