The recent housing crisis has made it difficult for anyone with a blemish on their credit to get a mortgage. After a car repossession, it can be exceptionally difficult to get a mortgage, but it is not impossible. You need to know the right steps to take in order to ensure that you can get on the path to home ownership.
Showing the Car Repossession is Paid
The first step in getting back on your feet is showing that the repo was paid. Lenders do not want to see an outstanding amount on your credit report. Even if your repo is still showing as outstanding, if you have the proof to show that it was paid off, it is usually sufficient for the lender. While no repo is a good thing, showing that the debt was eventually satisfied is crucial. There are two ways that the loan can be satisfied. One is when the car is sold for more than the amount that you had outstanding on your loan. This, of course, is rare as most people that default on their loans do so in the first few years of the loan, rather than towards the tail end when they do not owe as much. Second is for you to pay the difference between what the car sold for and what you still owe on your loan, rendering the account satisfied.
Improving your Credit
The next step in the process is improving your credit. This step will not occur overnight and will take some due diligence.
- The first step is to start paying all of your bills on time. This means any credit cards, personal loans and anything else that will report on your credit report. The more bills that you pay on time, the higher your credit score will get. Payment history accounts for 35 percent of your overall credit score, which makes this step extremely important if you need to increase your score.
- Keep your balances as low as possible. You want to use your available credit, but you also want to pay it off. The lower that you keep your balances in relation to your available credit, the higher your credit score will get.
- Avoid moving credit from one card to another, instead focusing on paying it off. Constantly shifting credit around can hurt your score, rather than help it.
- Avoid opening new credit unless you absolutely need it. This is typically only needed when you do not have enough open accounts to increase your credit score.
Get the Right Documentation for your Mortgage Lender
Of utmost importance when dealing with a car repo is showing that it now has a zero balance. You will need to get a paid-in-full or satisfied letter from the lender that you defaulted on your car loan with. This will show that you make good on your debts, even when you have to default on them. This will give you some “brownie” points in the eyes of the lender. Along with this required documentation will need to be a Letter of Explanation from you, stating why you had to default on your car loan. The reason needs to be a one-time circumstance, such as losing your job due to the company downsizing or experiencing a major health issue that you were unable to prevent. These circumstances in combination with the attempt to make good on the account will show the mortgage lender that you are responsible and take action even when things get out of hand.
Obtaining a mortgage after a car repo is not an easy task, but it can be done. Typically you will need to give the entire process around 2 years before you can apply for a mortgage. Of course, you can apply sooner, but you face the risk of a denial or the need to pay exceptionally high interest rates or have unfavorable mortgage terms. When you wait for your credit score to increase and for the debt to be fully satisfied, you have a better chance at getting a mortgage that is affordable and favorable for you.Click to See the Latest Mortgage Rates»