Did you know that, according to RealtyTrac, in the month of July 2011, 1 in every 611 housing units received a foreclosure filing? According to the American Housing Survey there are roughly 128,203,000 housing units in the country. If my calculations are correct, this means that about 209,824 housing units were foreclosed on in July alone. Needless to say, if you’ve had a recent foreclosure, you are certainly not alone.

Going through a home foreclosure can be an embarrassing and emotional time. It can be difficult to get financing for anything you might need, and this is especially true for the purchase of a new home. A foreclosure is one of the most damaging items to have on your credit, along with a bankruptcy or repossession. Even though it may seem hopeless, there are few steps you can take to make buying a home after a foreclosure a reality.

Buying A Home

Before you try to apply for a home loan after a foreclosure, it is essential that you understand the actions you need to take to get approved. Just because you have had a home foreclosed on, doesn’t necessarily mean you can’t afford another home, and it certainly doesn’t mean you will never get approved for a home mortgage again.

The Different Forms of Default

Individuals who have been through a foreclosure are going to fall into two different categories. Depending on which one you fall into, you may find it harder to be approved for a new mortgage.

Walkaways

A walkaway is exactly what it sounds like. These are individuals who simply “walked away” from their mortgage, usually to minimize losses already sustained in the housing market. Most commonly in these situations, the home owner owed far more than the house was worth, so instead of being upside-down in their mortgage for the rest of their lives, they cut their losses and walk away. According to CNN Money, If you made the decision to default on your mortgage as a financial strategy, it will most likely work against you when applying for a new mortgage. In some cases, you may be required to wait up to 8 years before purchasing a new home.

Defaults due to “Economic Hardship”

While there isn’t necessarily a “good” way to default on a mortgage, if you lost your home due to economic reasons out of your control, banks will look more favorably upon you when you are ready to purchase a home. People in these situations usually have had a significant income loss due to injury, or loss of job. If you are in this situation, begin working to pay down your debt and start improving your credit score. Generally in anywhere from 2-5 years you will be able to apply for a new mortgage, and be approved.

Improve Your Credit Score

When you go through a foreclosure, your credit score takes the biggest hit of all. Because the mortgage lending industry puts so much emphasis on credit scores, it’s imperative that you improve your damaged score before applying for a loan.

Probably the best way to improve your credit score, is to keep consistently paying all your other bills on time and in full. This shows potential lenders that you are a consistent borrower who pays debts on time. If it is at all possible, pay off remaining balances on credit cards and other lines of credit. Not only does this boost your credit score, but it also will lower your overall debt to income ratio, which will help greatly when applying for a mortgage.

If you don’t have any lines of credit open, open some and start paying on them regularly. Make sure to not borrow more than you can afford to pay back, as this will have a negative impact on your credit. Make sure you can make the payments on time too, because any late payments or missed payments with damage your credit score even further.

Applying For A Loan

When you finally get around to repairing your credit and are ready to apply for a home loan again, it’s important to know who to go to for your loan. For those with a foreclosure in their past, you will most likely need to go with a high risk mortgage lender or a sub prime broker. These are lenders who specialize in home loans for those with bad credit, and will be much easier for you to work with. Remember that most of these lenders will not lend to those with a credit rating below 500, so make sure you know what your credit score is before you apply.

Citations for this post:

• Les Christie, After foreclosure: How long until you can buy again?, CNN Money, 5/28/2010
• RealtyTrac Inc., U.S. Foreclosure Trends & Statistics., 07/2011
• Census.gov, American Housing Survey – FAQ., Q. 5, 2007