By Scott J. Clifford
Real Estate Attorney
Losing a house to foreclosure can create a feeling of home buying despondency, rooted in a belief that banks will easily say no to someone who has failed to successfully pay their mortgage payments. Yet if this were truly the case, the housing market would be even worse off, given the number of people who are in this situation.
During the foreclosure process, it is important to keep in mind how certain actions will affect credit ratings and an overall financial situation. While every late or missed mortgage payment will appear on a credit report, the impact of each action or inaction depends on what else is included in the credit report. If the report shows other credit cards with payments up to date, the effect of the missed mortgage payments is lessened somewhat. This is one reason why building up credit in general is important.
Having reasonable expectations about the mortgage process after a foreclosure is important. If the foreclosure remains an isolated event on one’s credit history, the ability to obtain a new mortgage in less time is enhanced. Still, lower interest rates will be out of reach, and some companies especially federal lending agencies like Freddie Mac and Fannie Mae have longer waiting periods or more stringent requirements. A sizable down payment is also likely.
Although a foreclosure typically remains on a credit report for seven years, this doesn’t mean that someone automatically has to wait seven years before buying a new home. Still, there is a waiting period, usually more in the range of three to five years. Some lending companies will consider awarding a new mortgage two years after foreclosure, but this is usually dependent on extenuating circumstances – such as immediate family death, serious illness, job transfer, or debilitating accident – having occurred.
Making the most of this waiting period is key to obtaining home-buying eligibility once more. Areas to focus on include building one’s savings, establishing a record of on-time rental payments, and paying down credit card debt to achieve a lower debt-to-equity ratio.
Buying a home through the traditional lending route is not the only option. It is possible to buy a home with cash, although this process takes a great deal of patience, planning, and discipline. Still, doing so avoids the need to show earning statements or possess a strong credit score for the benefit of a lender, and the cash buyer will benefit from an absence of monthly mortgage payments or interest payments, as well as higher net worth.
Buying a home with cash, much like buying a car with cash, can greatly increase the buyer’s ability to negotiate a better price.
Saving enough money to buy a house with a mortgage, usually about 20% of your income over several years is challenging. To supplement savings and perhaps shave a year or two off the total process, one might consider selling other assets or obtaining a second job with earnings that could be devoted entirely to the house fund.
Foreclosure is a challenging process for any homeowner to go through, but with planning and determination, it does not have to end the once highly regarded American dream.
About the Author
Scott J. Clifford is a partner at Epstein, Lipsey & Clifford, P.C., based in Hanover, Mass. A graduate of New England School of Law, Scott is admitted to practice in all courts in the Commonwealth of Massachusetts and Federal District Court in Massachusetts. He is also a member of the Real Estate Bar Association.