In this article:
Vehicle repossession is a type of derogatory event on your credit report that can impact your approval for credit cards and loans, including a mortgage. Generally, if your vehicle is repossessed and you're looking to apply for a mortgage, your approval odds can be slim.
Still, everyone's credit profile is unique, so it's hard to definitively predict the impact a repossession can have on your mortgage application. Let's examine how a car repossession can affect your credit and how long you should wait to get a mortgage after a repo.
How a Vehicle Repossession Affects Your Mortgage Approval
Depending on state law, a lender may be able to repossess your car after one missed payment, but typically vehicle repossession occurs once your loan payments are 90 days in default. A repo can seriously harm your credit, making it difficult to take out a new mortgage loan.
Vehicle repossession can hurt your credit in many ways, including:
- Late payments: Those missing payments can seriously harm your credit score since your payment history makes up 35% of your FICO® Score☉ , the credit score used by 90% of top lenders. Even one late payment can remain on your credit report for seven years, although its impact on your credit score will decrease over time.
- Repossession: A severely delinquent or derogatory account like a charge off or a repossession indicates to lenders you're a risky borrower. Such negative items on your credit report may be more challenging to overcome than a couple of missed payments.
- Collection activity: If your lender turns over your account to a collection agency, the collection could end up on your credit report for seven years, even if you pay back the debt.
- Court judgment: If there's a deficiency balance on your loan, a debt collector can sue for the remaining debt on the loan. You may be able to negotiate monthly payments with your lender to avoid a lawsuit.
It may be possible to qualify for a mortgage loan even after a vehicle repossession because eligibility requirements vary by lender, and lenders often assess risk differently. As a rule, most lenders tend to look at the age of the repossession, the loan's outstanding balance and other negative items on your credit report. Lenders also consider other credit factors such as your payment history and your debt balances compared to your available credit.
Some lenders are willing to work with borrowers with below-average credit and derogatory items on their credit reports. But if a lender does approve your mortgage loan, you'll likely receive less favorable loan terms—such as high interest rates and fees—to compensate for the added risk the lender is taking on.
How Long After a Car Repossession Should You Wait to Get a Mortgage?
A vehicle repossession stays on your credit report for seven years, although its impact decreases over time. The seven-year timeline begins on the original delinquency date of the first missed payment. The repossession will fall off your credit report after seven years and no longer impact your eligibility for mortgage loans, credit cards or other credit products.
The length of time you should wait before applying for a mortgage can vary widely depending on the lender and your unique credit profile. Generally, the more time that passes after a repossession, the less impact the repossession will have on your creditworthiness. Of course, mortgage lenders will consider other eligibility factors, including your credit score, income and debt-to-income ratio (DTI).
Keep in mind, conventional mortgage lenders typically require a credit score of 620 or higher. FHA requirements are less stringent, and you may be eligible with a credit score of 580 with a 3.5% down payment or a score of 500 with a 10% down payment. If your credit scores are sufficient and you don't have recent derogatory items or late payments on your credit report, you may have a greater chance of mortgage approval.
How to Improve Your Credit
With a recent vehicle repossession on your credit report, your odds of approval for a mortgage are poor, especially if your report shows a spotty payment history, collections and other negative items. You might consider working to improve your credit before applying for a mortgage. Follow these guidelines to bolster your credit even with a repossession on your credit report:
- Pay off the outstanding car loan debt. Pay off your remaining balance on your car loan as soon as you can since the presence of a vehicle repossession and ensuing collections can impact your credit score and influence your ability to qualify for a mortgage. For example, Fannie Mae, a leading provider of mortgage financing, requires collections to be paid off before you can close on a mortgage loan.
- Pay your monthly debt bills on time. Since payment history is the most important factor in your FICO® Score, make sure you're current on all your debt payments, including credit cards, student loans and personal loans.
- Keep your debt balances low. Your credit utilization ratio—the amount of your available credit you're using—makes up 30% of your FICO® Score and is also an important VantageScore® factor. If possible, pay off your credit card balances and avoid adding credit card debt while shopping for a mortgage loan. Experts often recommend using less than 30% of your available credit, but the lower your ratio, the better.
- Dispute inaccuracies on your credit report. Fixing errors on your credit report could positively impact your credit scores. Review your credit report regularly for accounts you don't recognize and other inaccuracies. Report any issues you find to the appropriate creditors and file disputes with any credit bureaus reporting erroneous information.
Check Your Credit Report and Credit Score for Free
While a vehicle repossession may initially prevent you from getting a mortgage approval, the good news is that you can rebuild your credit and try again. Follow your credit-building progress with free credit monitoring from Experian. You'll have access to your Experian credit report and your FICO® Score, along with a wide array of tools to help you strengthen your credit profile.