Can I Buy a House After Bankruptcy? | Getting a Mortgage After Foreclosure
Running Time: 8 minutes
Getting a mortgage right after a foreclosure or a bankruptcy may seem impossible. They tell you that you need to wait at least 2-3 years for another loan. But that’s just not true.
In this video, we’ll talk about getting a mortgage after foreclosure or bankruptcy. Because yes, it’s possible, and no, you don’t have to sell your soul to do it. But as you can imagine, the terms will not be the best, so you will need to refinance at a later point down the road. However, follow my suggestions, and you could be into a brand-new house of your own, before they have even properly evicted you yet.
I know the big question your asking is, “Can I buy a house after foreclosure or bankruptcy?” Believe it or not, you could actually buy right away. Conventional loans with their difficult restrictions are not the only way to buy a house. There are still loans out there that are more…. creative.
These loans are not ideal, in and of themselves. However, if you believe that the situation that led to your foreclosure is more temporary than it is long-term, then this could be a great way for you to get into a house now, and refinance in a few years when you qualify for a proper loan. This is possible as long as you know what you can actually afford—and to do that you need a budget.
My personal Story of Bankruptcy and Foreclosure
Personally, I had moved out of my house a full 2 years before the foreclosure finally happened. For us, we had years to fix the financial issues. We rented out the property while we had control, but all that has been behind me for about a year.
My wife and I currently have 700 scores, money for the down payment, and can easily make the monthly payments (as it’s lower than our current rent). The only thing holding us back is this foreclosure, even though I thought I had this taken care of with my bankruptcy 7 years ago. I guess not, so here I sit.
The waiting periods fluctuate, depending on how the banks are feeling this week. But in general, after a foreclosure, to qualify for a conventional loan, which is Freddie mae and Freddie mac, you would have to wait 4-7 years. That’s crazy. Luckily, FHA, USDA, and VA loans are shorter at 2-3 years. This means with a foreclosure or bankruptcy on your record, you have some waiting to do. However, if you want to jump back into the joys of home-ownership come hell or high water, then you could get yourself a subprime loan today.
Contrary to what many believe, the same subprime market that tanked our economy back in 2010 is still around; you just need to look a bit to find a broker that deals with this type of loan. The rules are basically the same as before. As long as you have a pulse, and money to throw at the problem, they can hook you up with a loan. Different banks have different rules, but in general, these are the types of things I found:
- 10-15% down, though gifts are allowed.
- 90-95% LTV (Loan to Value), though this likely doesn’t matter if you need to put down that 10-15% anyway.
- Interest Only. These keep the payments lower, but you will always be in debt 100% of the original purchase price. Avoid these.
- ARMs. These are bad. They tease a low-interest rate for a few years, then balloon up exponentially. Avoid these, because you do not know the banking market 1, 2, or 5 years from now. You may not be able to refinance when the time is right. If this is your only option, then renting is likely better for you.
- 45-55% DTI (Debt to Income) which is predatory, and be careful with this. Normally, it’s about 35% max—but these high DTI’s means you can qualify for more than half your salary! If you wanted to buy a new couch after you move in, you may not be able to afford the payment. I would only do this if I was to buy a Multi-Family, so that the tenant would pay much of the mortgage (but I’ll talk more about House-Hacks like this some other time).
Buying a house through a Non-Qualified Mortgage (Non-QM)
Regardless of how long ago the foreclosure or bankruptcy has passed, you can still buy a house in a few ways. For Non-Qualified Mortgages (Non-QM), you will be required to put more money down or shell out a higher interest rate. But in short, these mortgages look something like this:
- You will need to have up to 20% down payment if your bankruptcy was less than 2 years ago
- Your credit score can be less than 600 and even as low as 500
- Self-employed borrowers can actually qualify for these loans
- Interest rates will be slightly higher than a conventional loan
- Very few lenders have programs like these, so you will need to shop around
Keep in mind that only certain lenders will loan you money through a non-QM. Because of your recent bankruptcy or foreclosure, your credit score likely isn’t looking too good right now. But It’s still quite possible to get a non-QM with 10% down, if you somehow had a high credit score before the foreclosure happened. In case your credit score just isn’t high enough, a 20% down payment may be required. You may even be required to pay additional fees, or extra points, which is 1% of the total amount of your loan.
Some lenders may also require a certain amount of time between your bankruptcy and the instant you want to buy a property. This won’t be long like 2-3 years, but you will need to look into it. Here are a few lenders to get you started. I’ll have a link to their websites in the description below.
- Carrington Mortgage
- First National Bank of America
- Acra Lending
- Angel Oak Mortgage Solutions
- Peoples Bank
- ACC Mortgage
For what it’s worth, I chose to contact Acra Lending first because the down payment and credit limitations were the most lenient.
Buying a House Through Seller Financing (Rent to Own)
Another possibility, but difficult to find, is that you could also get direct seller financing. As hard as it is to believe, banks do not actually need to be involved in the sale of property. Let’s give an example of someone who has inherited a house, doesn’t want it, so they list it. Technically, you could go through Probate Court records to find people like this before they list it, but I won’t complicate this section with that.
Once you find a home owner that is willing to part with the property for a premium, you may be able to negotiate a Rent to Own situation. This means that the seller becomes the bank that you owe, and if you fail to make payments, they can foreclose. The benefit to them is they can rent at a premium, sell at a premium, and if you fail to make the payments, they get the house back.
The good news is that most sellers won’t really mind if you have a lower credit score as long as you meet the required down payment. They might also prefer a monthly mortgage payment as opposed to a generic rent payment for more security, so that’s another thing to consider. While this isn’t particularly common, that’s mainly because they likely never thought of it, but it’s actually quite legal. I once bought a house where the parents died, and the kids didn’t want the house anymore. This could be the type of situation you would be looking for.
Buying a House That’s Subject to Loan
This one is incredibly rare. It’s like finding a 40 year old sports car with 10,000 miles on it, being sold for $2,500. But this means buying property that’s essentially taking over the seller’s mortgage. You should check the legalities of buying a house subject to the mortgage of the seller in your particular state. Some states will allow you to do a land contract, which means that you pay a particular amount of money for a specific duration, and after which, the house becomes yours. While you’re making those payments, the deed of the property remains under the seller’s name. The thing with this though, is that most mortgages forbid the ability to do this.
Wrap Around Mortgage
As a combination of the previous two, a wrap-around mortgage means that there is an original bank mortgage that the seller owes, but they are re-selling the house to you, at a higher rate, without telling the bank. This could either be to family or a rent-to-own situation. Let’s say the original bank note is for $100,000, but the owner is selling it to you for $300,000, without closing out the original mortgage deed. Not always, but in most situations, this would be against the terms of the original contract. However, if you can find a homeowner that’s had the mortgage long enough, it may not be in the contract. Or if nobody tells the bank, then no harm, no fowl.
I hope this video has given you some insight into what you may be able to do next. For us, a bigger down-payment may be the proper solution as rent where I am in through the roof, and no signs of slowing down. If you are able to afford this higher down payment, then this may be the solution to your problems.