Buying Another Home After Foreclosure

by Becky
(Flint, Michigan, USA)

Ask Kate about buying another home after foreclosure: Kate, We lost out home due to the sub-prime loan practice, and are considering another home. I'm sure my credit is below poor.

Becky continues... Before we lost the home, we paid $15,000 to catch up the mortgage, thinking we were okay. We were then current. Ninety days later they sent a notice to vacate the property. I'm not sure if that is even legal, but we did.

Now I've found a nice home I'm interested in and have a 20 percent down payment. Will I still be able to finance, or do I need to look at maybe a land contract. The price of the home is $21,000. I don't know if it matters on the cost of the home and the deposit, or not. Any help you could offer would be appreciated. Thank you for your time.

Kate Answers: Buying Another Home After Foreclosure

Dear Becky,

You might be surprised to know how often I've heard mortgage borrowers say with surprise, "I can't believe the lender is giving me a difficult time. I only am asking to borrow a little money."

But in truth, a small loan amount or minimal purchase price does not equal less stringent underwriting guidelines.

As a side note though, large loans amounts in the Jumbo category come with more hoops to jump through. So this is one of those areas that doesn't make a lot of sense, at least on the surface.

Getting back to your question, the answer is yes, you will still need to meet all underwriting criteria for a home buyer who recently had a foreclosure, regardless of applying for a mortgage loan amount under $20,000.

Buying a Home - Downpayment - Loan-to-Value

Moving onto your second question - Is the percentage of down payment important after foreclosure?

Y-E-S. Very important. The downpayment compared to the purchase price is a crucial factor for any home buyer, especially a home buyer with a relatively recent history of foreclosure.

If you apply for a mortgage, you may hear the lender talking about loan-to-value. With your 20 percent down payment, your loan-to-value will be 80 percent. That's a great loan-to-value, one that causes a lender to be more willing to grant loan approval.

FHA Home Loans

However, as you mentioned, you do have poor credit. Weak credit makes it harder to obtain any type of mortgage program. So I suggest starting with FHA home loan programs. FHA, the Federal Housing Administration, insures mortgages for participating lenders. Home buyers with less than perfect credit find FHA mortgage loans are affordable and reliable as opposed to your sub-prime loan experience.

Much of the time, FHA home loans are approved at approximately 97 percent loan-to-value, or another way of saying the same thing, 3 percent down. But with your 20 percent downpayment, you may discover more leniency toward a past foreclosure.

Learn more about FHA loans here. And one more thing. If you do not get your loan approval, ask what you can be doing to prepare for a mortgage next year. Go here for ways you can start working on your credit scores now.

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Best wishes,

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