Q: I’ve had a foreclosure in the last four years. My credit score is 580. I’m working on improving it with the help of a credit company that is working on my behalf to negotiate with creditors to reduce my debt. Will I be able to qualify as a first-time homebuyer again when I do purchase? Also, what does my credit score need to be at to qualify for financing? –Simona, California
A: Many Americans are emerging from foreclosure in the same exact situation as you now find yourself. There are a number of moving parts to your question and your scenario, so let’s take them in turn.
First, your credit score. To obtain an FHA loan, post-foreclosure, currently takes a minimum credit score of 620-640 with most major lenders.
If you can get your credit score into the 700 range, you will be able to qualify for better interest rates. FHA loans are ideal for most former homeowners with a foreclosure in their history, because of their reasonable down payment requirements (3.5 percent minimum) and short post-foreclosure waiting period of three years, compared with conventional (i.e., non-FHA) loan programs, which require anywhere from 5 to 20 percent down, depending on your credit score, and a post-foreclosure waiting period of up to seven years before you can qualify for a new home loan.
My first concern that your current plan of action may actually work against your credit recovery and future homebuying plans arises from your mention of this debt negotiation company you are working with. Eliminating debt is an extremely worthy goal; frankly, most people who have experienced a foreclosure would do better to assign a much higher priority to getting rid of their debt than to buying another home. For those with a great deal of debt, I personally believe that debt settlement is a very viable option.
However, I don’t believe that the companies that do this work do anything you couldn’t do on your own; and they often charge great deals of money that would be put to better use actually paying the settlements you negotiate with your creditors directly.
Also, settling debts rather than paying them in full poses the potential to bring your credit score down before the debt elimination brings it up. FICO scores do not actually reward the debt-free; they reward the responsible, on-time payment and maintenance of debt. So, while settling debts might be the right thing to do, financially, you should be aware of the potential for this wise financial move to ding your credit score and delay your next home purchase.
If buying a home again in the next year or so is a high priority for you, I suggest you start working with a reputable mortgage professional now to put a strategic action plan in place for knocking your debt out without trashing your credit score.
When you do decide to purchase a home, whether you are able to "qualify" as a first-time homebuyer will depend on what specific first-time buyer assistance program you apply for, but the answer is likely "yes."
Most first-time buyer programs define a first-timer as someone who has not owned a home in the jurisdiction providing the assistance program (be it a city, state or federal program) in the past three years. Be aware, though, that many of the first-time buyer programs that were so attractive to buyers in recent years are now expired or defunct, like the $8,000 first-time buyer tax credit, which expired on April 30.
FHA loans, contrary to popular belief, are available to all buyers; not just first-timers.
However, there are a number of local and state down payment assistance programs that are available only to first-time buyers. If that’s the sort of program you had in mind, you should search online for the specific program in which you’re interested and check out their particular definition of "first-time homebuyer."