Can an Eviction Affect Buying a Home?

An eviction can significantly influence the ability to purchase a home, though it does not always represent an absolute barrier. While the eviction itself might not appear directly on a credit report, associated financial consequences can create substantial hurdles for aspiring homeowners. These effects typically manifest in reduced credit scores and increased scrutiny from mortgage lenders during the underwriting process.

How Eviction Affects Credit Scores

The circumstances surrounding an eviction, particularly unpaid rent or damages, can lead to negative entries that significantly impact credit scores. If a landlord refers unpaid rent to a collection agency, this collection account will be reported to Experian, Equifax, and TransUnion, and can remain on a credit report for up to seven years. This negative mark can cause a drop in FICO and VantageScore credit scores.

Legal judgments against a tenant for unpaid rent can also affect a credit report. If the debt associated with the judgment is sent to collections, it will still appear and negatively influence the score. Payment history accounts for a significant portion, typically 35%, of a FICO Score, making any late or missed payments, especially those leading to collections, damaging.

A strong credit score is important as it signals to lenders a borrower’s reliability and financial responsibility. Lower credit scores can result in higher interest rates on loans, increasing the cost of borrowing. A poor credit history can also lead to loan denials or less favorable loan terms, such as higher down payment requirements. The presence of collection accounts or judgments indicates a higher risk to lenders.

Lender Underwriting and Eviction History

Mortgage lenders assess an applicant’s financial history through a comprehensive underwriting process that extends beyond a simple credit score. Lenders can access public records databases where eviction filings and judgments are recorded. These records can provide an indication of a past eviction, signaling potential financial instability or a history of defaulting on housing payments.

Lenders also verify rental history, which can reveal past evictions or patterns of late payments. They may request a Verification of Rent (VOR) form from previous landlords or analyze bank statements for consistent rent payments. Fannie Mae has an initiative that allows automated underwriting systems to consider positive rental payment history from bank statements, which can help applicants with limited traditional credit. This system only factors in positive history, not negative.

An eviction history can influence a lender’s assessment of a borrower’s debt-to-income (DTI) ratio, particularly if the eviction involved significant unpaid debts. Lenders might also require higher financial reserves to mitigate perceived risk. Mortgage reserves are liquid assets, expressed as months of mortgage payments (principal, interest, taxes, and insurance), that demonstrate a borrower’s ability to cover housing costs during unexpected financial challenges. While not always required, conventional loans for owner-occupied properties might require two months of reserves, and requirements can increase for higher-risk profiles or certain property types, ranging from two to twelve months.

Steps to Rebuild Financial Standing

Rebuilding financial standing after an eviction involves several deliberate actions to improve credit and demonstrate financial responsibility. A primary step is to obtain and review credit reports from Experian, Equifax, and TransUnion to identify any inaccuracies or outdated information. Any errors should be promptly disputed with the credit bureaus to ensure the report accurately reflects the financial situation.

Addressing outstanding debts related to the eviction, such as landlord collections or judgments, is necessary. Negotiating with collection agencies or former landlords to pay off these debts, possibly through a payment plan or a lump-sum settlement, can help remove these negative marks from credit reports. Some collection agencies may even agree to a “pay-for-deletion” arrangement, removing the account from the credit report once the debt is settled.

Establishing new, positive credit history is also necessary. This can be achieved through secured credit cards, which require a cash deposit that acts as the credit limit. Using these cards responsibly, by making small purchases and paying the balance in full and on time each month, can help build a positive payment history, which is a significant factor in credit scoring. Another option is a credit-builder loan, where payments are made into a savings account and reported to credit bureaus, demonstrating repayment ability.

Saving for a down payment and building financial reserves are necessary for mortgage qualification. Down payments range from 3% to 20% of the home’s purchase price, though some government-backed loans may require less or even 0%. Having cash reserves, equivalent to several months of mortgage payments, can strengthen a mortgage application, especially if there are other risk factors present. Gathering proof of positive rental history since the eviction, such as 12 months of on-time rent payments verified by bank statements or landlord references, can be beneficial in demonstrating current financial stability to lenders.