Having your car repossessed creates significant challenges but you may be able to qualify for a mortgage. Continue reading to understand how a car repossession impacts your loan application and the steps you can take to improve your ability to get approved for a mortgage.
First, it is important to understand the multiple ways the events leading up to and after your is repossessed impact your credit report and credit score. Missed payments -- which resulted in the repossession -- the repossession itself and any related collection accounts and judgments all appear on your credit report for up to seven years.
These events can have a significant negative effect on your credit score. By some estimations, having your car repossessed can cause your credit score to drop as much as 100 points, which can certainly impact your ability to qualify for a mortgage.
You can use websites or apps to review your credit report for free before you apply for a mortgage. This enables you to understand how the car repossession appears on your credit report and learn your current score.
This is an important step because most loan programs apply a minimum credit score requirement so if your score is too low, you may not be eligible for a mortgage. For example, conventional low down payment programs and the VA mortgage program usually require a minimum score of 620 while the USDA home loan program requires a score of 640.
The positive news is that the FHA mortgage program requires a credit score of only 500 if you make a down payment of at least 10% of the property purchase price and credit score of 580 if you put down between 3.5% and 10%. This is why an FHA loan may be a good option if your credit score is a little beat down because your car was repossessed.
The table below shows mortgage terms for FHA lenders near you. We recommend that you contact multiple lenders to learn more about qualification requirements. Shopping lenders is also the best way to save money on your mortgage.
Your credit score also affects the mortgage you can afford. Although loan terms vary by program and other factors, a lower your credit score usually means that you pay a higher your mortgage rate which increases your monthly payment and reduces the mortgage you qualify for.
In addition to knowing your credit score, reviewing your credit report should also enable you to understand the current status of the repossession. If the car loan lender was able to sell your car and use the proceeds to pay off your entire loan balance then the matter should be resolved.
This is the best case outcome for you. In this scenario, your concern is limited to how the repossession affects your credit score as we explained above.
If the car loan lender was unable to recover the full amount of their loan by selling your car, then they may refer the account to a collection agency. In this case, a collection account should appear on your credit report. While that sounds bad, we want to emphasize that having a collection account on your credit report does not necessarily mean you cannot qualify for a mortgage.
According to conventional mortgage guidelines, you are not required to pay off the collection account, although some lenders may apply more conservative requirements and make this a condition to approving your loan. In many cases, however, you can get approved for a mortgage with a collection account on your credit report.
For an FHA or USDA mortgage, you are required to pay off or establish a payment plan if you have more than $2,000 in total collection accounts. Any payment you agree to with the car loan lender is included in your debt-to-income ratio which may reduce the mortgage amount you can afford.
For a VA mortgage, if you have two or less accounts in collection and the rest of your credit history is positive, you are usually are not required to pay off the collection account to qualify for the loan, although some lenders prefer that you do.
To summarize, although it is not ideal if a car repossession results in a collection account, this should not stop you from applying for a mortgage as long as you meet the minimum credit score and other qualification requirements. In some but not all cases you may be required to pay off the collection account or arrange a payment plan with the car loan lender to qualify for the mortgage.
We recommend that you get pre-approved for your mortgage so you can identify and address any potential issues before you apply for the loan. Our pre-approval form is free, easy-to-use and does not affect your credit.
The final scenario to consider is if the car loan lender or the collections agency obtains a court order, also known as a deficiency judgment, that requires you to pay the outstanding amount you owe after your car was repossessed and sold. For example, if you owed $5,000 on your car loan and the lender sold your car for $4,000, a judge could issue a deficiency judgment for $1,000 plus late fees, towing costs and other transaction expenses.
The deficiency judgment appears on your credit report and in almost all cases, lenders require you to pay off the judgment or establish a payment plan to qualify for a mortgage. This is likely the worst case scenario if your car is repossessed but if you are able to resolve the matter with the car loan lender or the collections agency you still may be able to qualify for a mortgage.
In closing, having your car repossessed is definitely not a positive development but you should not let it stop you from moving forward with your life. After you understand how the repossession impacted your credit report and score your next step is to contact lenders to understand what is possible.
With the right lender and loan program, getting approved for a mortgage may be well within your reach.
"B3-5, Collections, Charge-Offs of Non-Mortgage Accounts, Judgments, and Liens." Selling Guide: Fannie Mae Single Family. Fannie Mae, February 5 2020. Web.