- Learn about qualifying for a loan with a foreclosure in process.
- Examine the pros and cons of having a co-borrower on a loan with you.
- Consult with a licensed estate planning attorney, whenever issues regarding inheritance arise.
I'm in the middle of a foreclosure, but have good credit and income with no other debt. How do I qualify for a new mortgage?
I currently have a home loan awaiting foreclosure due to a divorce / job relocation situation. I'm currently renting a different place in a different part of the country. I'm hoping to purchase a home, but am afraid of possibly not qualifying (I have excellent credit other than the existing late mortgage -- no debt and good income). What are my options at this point? Can I still qualify for a loan or should I get a co-signer? If no to the above, could I have a parent purchase the home and sign over to me (assume the loan)? If a parent purchases the home and dies, could they sign it over to me in a will and would I then assume the loan? Could my existing mortgage creditor come after me and place a lien on the new house?
You raise at least three issues in your message. I will address each below separately:
Qualifying for a Mortgage
A mortgage lender wants four qualities from a potential customer: Steady income, a relatively clean recent credit history, a debt-to-income ratio of 35% or less, and a down payment. Customers who qualify for a mortgage have all four of these qualities. See the Bills.com resource Mortgage Basics to Know Before You Apply for a Loan for a longer discussion of these issues. The two least-understood are credit history and debt-to-income ratio, so I urge to you to focus your attention on those two.
When get a new loan or credit card, the agency will review your FICO score to determine your eligibility. Though your FICO score may be good now, once the mortgage lender has reported your imminent foreclosure to the three reporting agencies, your FICO score will drop, which will cause difficulties in qualifying for a new loan. Even FHA Government loan programs, that have less stringent credit qualifying requirements than standard loans view a foreclosure very seriously. FHA loans generally require that the borrower not have a foreclosure or been issued a deed-in-lieu of foreclosure for the past 36 months. This is not a hard and fast rule. If a borrower can demonstrate a good payment history after the foreclosure and a reasonable explanation of why the foreclosure took place, the loan could be approved.
It is advisable to get your credit report and analyze it. Ideally, you should get a credit report and analysis once a year. The three nationwide consumer reporting companies have set up one Web site, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit AnnualCreditReport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
If you find any inaccurate information on your credit report, you should dispute the credit report listing with the bureau in question. See the Bills.com resource Dispute Credit Report for more about this process.
Assuming that the co-borrower will not occupy the house with you, he/she will become a non-occupying co-borrower. In this case, the lender will use his/her credit score to help you qualify. However, you as the primary borrower, must be able to qualify with your debt-to-income ratio. In other words, your income alone must be enough to cover the payment — your lender will generally require that the mortgage payment, including taxes and insurance be no more than 33% of your gross income. So if you can qualify with your income, then it will be beneficial to have the cosigner cosign on the mortgage with his or her higher credit score.
A cosignatory guarantees payment in case the primary borrower defaults. As such, the cosignatory assumes considerable liability. If a person agrees to be a cosignatory, he/she should make an agreement with the primary borrower that when the primary borrower’s financial picture and credit score improves, the primary borrower will refinance the loan to remove the cosignatory.
If your parents agree to be co-borrowers on the loan and are listed on title, you all need to be aware of how that can affect inheritance issues. If they list you as their beneficiary for the property, you need to know the what happens to the mortgage when one or both of them dies. See Dealing with a Mortgage & probate as this article by Bills.com cites information on what generally happens when the person living in the home is not on title or mortgage.
Bills.com has a plethora of information on foreclosure to help understand what options you have and how it affects your credit score.
You may find a bank to issue an assumable mortgage, although this is unlikely. If the purchaser is your parent, and subsequently dies, the mortgage would be due upon death. If it was an assumable mortgage that could be different. Also, who would be fronting the down payment? All of this would need to be in writing to address the rights and liabilities of all parties.
You question whether the existing mortgagor would put a lien on your "new" home, indicates that you owe more on the your existing home than it is worth. The question on deficiency balances depends on which state your home is in as those laws vary from one state to another. Much of your answer can be found in previous articles by Bills.com titled: Deficiency Balance and Home foreclosure Advise and Advice on Bankruptcy and Deficiency Balance on a Second Mortgage.
Whether you get a co-borrower will truly depend on the mortgage lender and if you have someone willing to take the risk of being responsible for a mortgage payment if you default. Being a co-borrower for a mortgage is a big responsibility.
I suggest consulting with an attorney in your state who has experience in real estate law to ensure that you understand your rights and liabilities. Finally, spend a few minutes to learn if a no-cost mortgage is right for your situation.
I hope this information helps you Find. Learn & Save.