How to Buy a Home With a Foreclosure on Your Credit Report

By W D Adkins

It might seem that buying a home if you have been foreclosed on would be impossible. In fact, many lenders will not write a mortgage for someone with a foreclosure on their credit record. However, the Federal Housing Authority (FHA) and the Department of Veterans Affairs (VA) have home loan guarantee programs designed for people with limited resources or past credit problems. Depending on your current credit standing and how long ago the foreclosure happened, it may take you up to three years to qualify for a FHA or VA loan. However, both agencies have a flexible approach and with some work and a willingness to demonstrate responsible use of credit, you will be able to buy a home with a foreclosure on your credit report. Once you meet FHA/VA criteria, a guarantee from one of these agencies virtually assures your mortgage application will be approved.

Make sure your credit report is free of errors. Out-of-date or inaccurate information can lower your credit score. The FHA and VA require modest scores but a foreclosure will lower your score to start with and you don't want to be further handicapped. You have the right to a yearly free credit report from each of the major credit bureaus. Use the link below to order your free credit reports through the FTC's authorized provider, AnnualCreditReports.com (this is the only FTC-authorized source for free credit reports).

Determine your eligibility for a VA home loan guarantee if you are a veteran. You must have 181 days of service (90 days in wartime) and not have a dishonorable discharge. You will need your discharge (Form DD-214, Member 4 copy) to complete and file VA form 26-1880 to establish your eligibility for a VA home loan.

Make paying bills on time your top priority. In general the FHA looks for a credit score of 580 to 620 or higher. You should have at most one payment 30 days late in the last two years plus an overall record of timely payments. Your rent payments must be on time for at least one year. When you apply to the FHA/VA, have monthly statements of your bills showing you are current on all payments and the name and contact information for your landlord (or canceled rent checks for the past 12 months).

Assess your employment record and income. You need a stable employment record for two years (preferably at one job) with income that is also stable or that has increased over that time. Be realistic about how much house you can afford. The FHA requires the mortgage payment be no more than 30 percent of your gross income .For the VA the standard is 41 percent including monthly payments for other debts. Be sure to include any stable sources of income other than wages like Social Security benefits. When you apply you will need copies of your W-2 forms and income tax returns for the last two years. If you are self employed you need a year-to-date profit and loss statement plus your tax returns for the last two years.

Develop a plan for establishing good use of credit over a two to three year period. Unless there are extenuating circumstances for a foreclosure (such as a serious illness) the FHA requires a record of responsible use of credit for three years following a foreclosure. The VA standard is two years.

Document your assets. Both the FHA and the VA like to see that you have a savings plan and limit your use of credit. Have recent statements for savings accounts, CDs and retirement accounts along with documentation of any money market accounts or securities you own such as stocks or bonds.

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