Survive a Financial Crisis (and Still Get a Home Loan with Bad Credit)
Money Girl answers a listener question about getting a mortgage with bad credit, and gives tips for surviving a financial crisis and rebuilding your credit as quickly as possible.
Laura Adams, MBA
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Survive a Financial Crisis (and Still Get a Home Loan with Bad Credit)
A Money Girl listener named Robin, from Mississippi, asks:
“After my husband lost his job, we couldn’t pay our mortgage, and lost our home due to foreclosure in 2008. Since then, we’ve felt hopeless, and haven’t paid much attention to our finances. But I’m 45, and ready to stop sticking my head in the sand.
We want to buy the home that we currently rent—but don’t know if we could ever get a home loan with bad credit. This is a terrible, embarrassing, and scary situation for us. But I do have a great job, with benefits, as a nurse, and am contributing the maximum to my retirement plan. What’s your advice?”
Later in this episode, I’ll answer Robin’s question about getting a mortgage when you have bad credit. But first, we’ll cover tips for some of the other things her question brings up, including surviving a financial crisis, getting back on your feet, and rebuilding your credit as quickly as possible.
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How to Survive A Personal Financial Crisis
At some point, almost everyone experiences an unexpected crisis that rocks your financial world. It could be losing your job, getting a huge medical bill, or having your car break down at the worst possible time.
Here are 5 tips to manage the emotional stress that you might feel during a personal financial crisis:
Tip #1: Stay Positive
As difficult as it might be to put a financial crisis into perspective, it’s critical. No matter what challenge you’re facing—such as foreclosure, bankruptcy, or a mountain of debt—you’re not the first. Millions have gone through a similar financial disaster and survived.
Now, I’m not trying to minimize the stress that comes from a financial catastrophe. Just remember that creditors can sue you and garnish your wages, but they can’t put you in jail or eat you!
Be grateful for what you do have, and remember that you’re still better off than the millions of people on Earth who struggle to find food and clean water on a daily basis.
See also: The Law About Debt Collection Harassment
Tip #2: Accept the Situation
Life throws us financial curveballs. The key to handling them successfully is to be realistic, not to stay in denial. Robin mentioned that she’s been putting her head in the sand for some time. Unfortunately, if you don’t face money troubles head on, you can compound the damage.
Instead of focusing on the problem, being angry, or feeling stressed out, channel your emotions into finding solutions. That means stop internalizing the issue or keeping it a secret, and start talking about it with people such as your family or counselors.
Turn to people you trust, such as a spiritual advisor, a financial adviser, a legitimate credit counselor, or an attorney, depending on your situation. They can help you consider solutions to clean up the problem and make sure you never have to deal with it again.
See also: 10 Ways to Deal with Money Stress
Tip #3: Survey the Damage
Once you’ve accepted that you’re in financial trouble, it’s time to survey the damage by completing 3 tasks:
1. Create your Personal Financial Statement (PFS) to get a bird’s-eye-view of your financial situation. Your PFS is a list of your assets (such as cash accounts, investments, real estate, and vehicles) and your liabilities (such as mortgages, loans, and credit card debt.) When you subtract your total liabilities from your total assets, you’ve calculated your net worth, which is an indicator of your financial health. If you’re in financial trouble, you probably have a low or negative net worth. Use a Net Worth Calculator to make creating your PFS simple
2. Record your spending history to see you cash inflows and outflows for the past several months. You may be doing this already if you keep abudget or spending plan. If not, it’s time to take a cold, hard look at where your money is going, and cut all expenses except the absolute necessities.
3. Check your credit report to find out what your credit history looks like. You can get it for free once a year from each of the 3 national credit reporting agencies at annualcreditreport.com.
See also: Your Credit Score Survival Kit — a free video tutorial that shows how to check each of your credit reports and build credit fast.
Tip #4: Contact your Creditors
If you haven’t been in contact with your creditors, start a dialog with each one immediately. Never try to hide from a creditor because–believe me–they won’t forget about you.
You’ll come out ahead and get favorable treatment from creditors if you’re proactive with communication, and are honest about your financial troubles. Ask them for solutions, such as deferring payments for several months, setting up a reduced payment plan, or refinancing a loan to take off the pressure.
By the way, creditors are likely to ask details about your financial situation, so have the information from my previous tip, such as your monthly income and expenses, on hand when you speak to them.
See also: Should I Pay Off Old Debts or Settle Them for Less?
Tip #5: Maintain an Emergency Fund
Many times, we get into financial trouble in the first place because we don’t have a financial safety net. Once you begin to work through a money crisis, make it a goal to accumulate a reserve equal to 3 to 6 months’ worth of your living expenses.
If that’s too overwhelming to think about, start with a smaller emergency fund target, like saving $500 within the next year, or putting away $50 a month. Having some amount of financial cushion to keep you safe is far better than having none.
See also: 3 Emergency Fund Mistakes to Avoid
If you manage your credit responsibly, you may be able to get a mortgage before bad marks drop off your credit report.
How to Get a Home Loan With Bad Credit
Many people, like Robin, who lost their homes during the Great Recession are now considering becoming homeowners again. But getting a mortgage can be challenging for any buyer, not to mention those with a foreclosure on their credit history.
Most black marks in your credit file—such as a foreclosure or late payments—typically stay there for 7 years. But the good news is that if you manage your credit responsibly, you may be able to get a mortgage before bad marks drop off your credit report.
See also: Best Mortgage Company to Shop Your Home Loan
To get a home loan after completing foreclosure, you must rebuild your creditand go through a waiting period. Here are general guidelines on waiting periods for different types of mortgage loans:
- Conventional loans have waiting periods that may vary from 2 to 8 or more years, depending on whether they’re backed by private lenders or government agencies.Those backed by Fannie Mae or Freddie Mac typically require a 7-year waiting period. However, the time may be shortened to 3 years if you can prove that foreclosure occurred due to circumstances beyond your control, such as a job loss, divorce, or medical emergency.
If you cooperated with your lender and completed a short sale, instead of going into foreclosure, you may only have to wait 2 years to qualify for a conventional mortgage.
In most cases, you’ll also need a maximum loan-to-value (LTV) ratio of 90%, which means making a down payment of at least 10% of the home’s purchase price. If you can make a larger down payment, such as 25% or more, that may qualify you for an even shorter waiting period.
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Federal Housing Authority or FHA loans typically require a waiting period of 3 years. But if you can prove that foreclosure occurred due to events outside of your control, it’s shortened to just one year. FHA loans require you to make a down payment of at least 3.5%.
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Veterans Affairs or VA loans typically require a 2-year waiting period and no down payment, but require you or your spouse be serving in the military, or be a veteran.
My advice for Robin and all prospective home buyers is to make sure you have both a healthy emergency fundand down payment saved up. Additionally, you should be investing at least 10% to 15% for retirement.
If you meet those requirements and are certain that you won’t need to move for at least 5 years, homeownership may be a good choice for you. To consider the pros and cons of renting versus buying, read or listen to Should You Rent or Buy a Home?.
If you’re ready to move forward, the next step is not to call a Realtor or start combing through real estate listings—it’s to get pre-approved for a mortgage.
Reach out to good lenders and home sites such as USAA, Quicken Loans, and Zillow. Explain your situation, and ask what you need to do to get pre-approved for a mortgage. It might take some time, but lenders will help you understand what’s possible, and how you can become a home owner again.
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Images of empty wallet, couple in debt, savings clock, and couple with financial planner courtesy of Shutterstock.
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.