Are You A Boomerang Home Buyer? Here's What You Should Know
A mortgage foreclosure is a stressful event in both your personal and financial life - but it doesn’t mean you’ll never own another home. If it’s been a few years, you can certainly start planning to apply for financing to buy residential real estate.
If you’re keen to join the ranks of boomerang buyers who have overcome the negative effect of foreclosure on their credit scores, read on. In this article we’ll take a look at the steps involved.
The Waiting Period
At the outset, it’s important to note that a foreclosure is a major credit event - and unfortunately it’s not a positive one. Your credit score is almost guaranteed to drop significantly as soon as this occurrence is reported to the three main credit bureaus and you can expect it to stay low for several years.
- You’ll want to wait two to four years after your foreclosure before you apply for another mortgage.
- You can start repairing your credit from day one and save up a sizable down payment that’ll put your lender’s mind at ease when you make your application.
Your credit score is the most important factor in the outcome of a mortgage application. Let’s take a look at a few strategies you can employ to raise it before you apply.
How To Improve Your Credit
Your FICO score (the main measure of your creditworthiness used by lenders along with VantageScore) is calculated using a specific formula.
Knowing the factors that go into this calculation is important because you can optimize them through your borrowing and debt repayment behavior to help your score increase faster. Here are some things you can do to repair your credit effectively.
- Pay your debts on time: Payment history is the most important factor in your score - and even a single late or missed payment can cause your numbers to drop
- Keep your credit balances low: The total balance owed on your credit cards shouldn’t exceed 30% of your available limit
- Don’t close your accounts: The length of your credit history contributes toward your FICO score. If your accounts are in good standing, it’s best to keep them open
- Apply for new credit - but not all at once: Having a healthy mix of credit cards, loans, and other types of lending products in your name can help boost your numbers. Still, you’ll want to manage your debts well and leave several months or even a year between applications
How To Manage Your Debt
Repairing your credit score is easy when your debts are under control along with accounts in good standing. Here are some tips for borrowers who want to improve their debt management skills.
- Don’t over-borrow: After a foreclosure you’ll want to create a positive credit history which demonstrates that you’ve turned over a new leaf to potential lenders. Keep your credit balances low by only borrowing funds if you really need to
- Stick to your monthly budget: By trimming your expenses and boosting your income you’ll create a surplus - and you can use these funds to pay down your debts and save up for a down payment on your new home
- Never miss a payment: Schedule your credit accounts for autopay or make a note of your due dates so you won’t need to worry about late payments again.
Down Payments
Having a cash deposit available when you apply for a mortgage can help you get approved even if your credit score isn’t perfect - and it can also help you to secure a better APR on your loan.
- As a boomerang buyer, you may be required to pay a down payment of 5% to 10% of your home’s value or more. The precise amount will differ according to the lender you choose to deal with
- The bigger your down payment, the lower your monthly installments will be - and the more confidence your lender will have in the state of your finances
Conclusion
A home foreclosure can cause a serious drop in your credit score - but it won’t last forever. By waiting the appropriate number of years, rebuilding your credit, and preparing to apply for a mortgage with a hefty down payment,you’ll ultimately boost your chances of approval.
