How to Get a New Mortgage After a Deed in Lieu of Foreclosure

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For a struggling homeowner, a deed in lieu of foreclosure is sometimes a more attractive option than foreclosure. The homeowners simply turn over possession willingly. The question for homeowners afterware, though, is a big one: How can they get a new mortgage loan and a new home after a deed in lieu of foreclosure wrecks their credit score? Fortunately, time can heal a damaged credit report, and allow consumers who've been through this process the chance to buy a new home.

Wait before applying for a new mortgage loan, giving yourself time to practice the sound fiscal habits that can rebuild your credit score and make you an attractive borrower to lenders. A deed in lieu of foreclosure will stay on your credit report for seven years and drop your credit score by 85 to 160 points. That's important because lenders today rely heavily on your three-digit credit score; they consider scores of 740 or higher on the FICO scale to be top scores. If your score is much lower, you'll pay higher interest rates, something that will boost your monthly mortgage payment. And if your score is too low, many lenders won't give you a mortgage loan at all.

Pay your bills on time, reduce your credit card debt and close any credit card accounts that you no longer use. These are the best ways to rebuild your credit. You won't have to wait a full seven years before applying for a mortgage loan after a deed in lieu of foreclosure. But you will have to wait long enough to rebuild your score. Don't expect to qualify for a new mortgage loan for at least two to three years.

Call several mortgage lenders who are licensed to do business in your state after you've rebuilt your credit score to a solid level. Shop around for the lender promising the best interest rates and lowest closing costs. If you are applying for a mortgage loan within seven years of the date of your deed in lieu of foreclosure, you will have to admit to your lender that you did lose a house in the past. Explain the circumstances behind your deed in lieu of foreclosure. Maybe you lost your job, but you now have a better paying one. This could help assure your lender that you aren't as likely to fall behind on your mortgage payments again.

Provide your lender copies of such documents as your most recent work paycheck stubs, income tax returns and bank statements. Your lender will use these to determine whether you can afford a new mortgage. Lenders prefer that borrowers' total monthly debts -- including their estimated new mortgage payment -- equal no more than 36 percent of their gross monthly income. You can boost your chances of qualifying for a home loan if this debt-to-income ratio -- known as your back-end ratio -- is lower than this threshold, even if you have a deed in lieu of foreclosure in your past.