Wondering how to buy a home after foreclosure? According to the statistics, over 1 in 8 adult Canadians will at some point experience devastated credit, whether from foreclosure, a bankruptcy, or a negotiated debt settlement. Most of them will want to buy a home and get a mortgage some day, but for many of them they will discover their options are fairly limited.
After the credit crisis, the amount of funding available for high-risk mortgages shrank considerably. More than a dozen subprime lenders in Canada ended up closing their doors.
Today, the riskier class of home buyers — those with subprime, or non-prime credit — represent under 5% of borrowers. With the housing landscape still a little shaky and regulators as nervous as ever, that means lenders are exceedingly careful.
This all means that for the credit challenged home buyer it’s not easy to get the best mortgage. Doing it takes planning and discipline. If you’ve recently seen your credit go south, here are a few things you’ll need to know.
How to Buy a Home After A Foreclosure – Steps you can take to ensure success
Most mainstream lenders will refuse to even consider giving you a mortgage or loan until your foreclosure, bankruptcy, or consumer proposal has been discharged for a minimum of two years. On top of this, you’ll need to show fully provable income and stable employment.
If you’re not interested in waiting two years, your options shrink a lot. You can still get a mortgage, but instead of a 5% down payment like you would make with a “prime” lender, you’ll need to go with an uninsured or perhaps a private lender. Here you may need to put down as much as 10 or 25 per cent.
Rent to own is another option. With this, the private lender buys the home and you rent while repairing your credit, then transition out of the loan at the end of a two-year period.
The Lending Premium
Mortgages are priced based on risk. If you want a mortgage quickly after a foreclosure, expect to pay a premium (on top of broker fees) of 1-2% or even more. How much you’ll pay depends on the stability of your income, the property, the equity, and the story behind your foreclosure.
If you have a reasonable explanation for the foreclosure, then non-prime rates can be as much as 1/4 point better. Lenders tend to be much more sympathetic to foreclosures caused by medical crises than they do for foreclosures caused by spendaholics who simply didn’t pay their debts.
If you can show 6 to 12 months worth of perfect payment on your utilities, cell phone, or rent, then rates and fees may also go down.
The “Credit Purgatory” Period
Foreclosures and bankruptcies mean that you’ll have to atone for your sins, credit-wise, by earning back the trust of lenders. One way to do it is by re-establishing credit.
Doing this means you have a minimum of two credit accounts, and each have a two-year track record. These might be major credit cards, car payments, installment loans, or the like. Each needs at least a credit limit of $1000-$2000 so that lenders will take them seriously.
The most popular way to re-establish credit is by using a secured credit card. These require you put down a security deposit and approval is almost guaranteed. The key is to choose a card provider who will give your deposit back after you prove your creditworthiness. You can do this by paying on time for 1-2 years, always paying more than the minimum, and never spending above 60 per cent of your credit limit.
TD and a few other banks offer secured cards that don’t have annual fees, which do have rebate rewards, and which pay interest on your deposit. Others, like Capital One, will consider giving you a higher credit limit than what you pay as a deposit. Either way, be sure to pick the right card up front, since canceling your credit card can hurt your overall credit score.
A Shorter Mortgage Term Is Better
As a non-prime borrower, most mortgage advisers recommend you pick a 1-2 year term. This gives enough time to recover from your credit problems and helps you avoid paying a higher-than-necessary rate for longer than you need to pay it. Once you have your mortgage, a good broker will be able to coach you on rebuilding your credit and then refinancing with a lower-cost traditional lender.