How To Rebuild Your Credit After Foreclosure
If you’ve been through a foreclosure, you may wonder if there is hope for you to become a homeowner again. The answer is yes, but it will take a while.
A foreclosure is a major hit to your credit history and stays on your credit report for seven years.
Foreclosure is one of the FICO seven deadliest, regardless of the back story— whether it’s a job loss, rate reset, underemployment or other reasons.
So, after a foreclosure, your priority has to be rebuilding your credit. You’ll have some time to do so, because mortgage giants Fannie Mae and Freddie Mac impose strict rules on how long it will take before you’re eligible for another mortgage.
For example, borrowers with a prior foreclosure and extenuating circumstances—such as a job loss, divorce or medical issues—must wait three years before they can qualify for a Fannie Mae-backed loan. For all other borrowers, the waiting period is seven years.
At Freddie Mac, those who can prove extenuating circumstances must wait three years before applying for a new mortgage; everyone else must wait five years. But that will change in February, when the waiting period for those whose foreclosure was caused by their own financial mismanagement will increase to seven years.
Here’s what you need to do to rebuild your credit to qualify again for a mortgage:
Pay your bills on time: Make sure you consistently pay your bills on time. Demonstrated that you are now capable of owning a home and paying the bills, and have recovered from whatever circumstance caused the original foreclosure?
Review your credit report: You’re entitled to a free credit report once every 12 months. You should get a copy and check it for any inaccuracies.
To get your free credit report, go to http://www.annualcreditreport.com. Make sure that debts older than seven years have rotated off your report, as these could be dragging your score down unnecessarily.
Check your mortgage: You want to be sure that you don’t still owe anything on your old mortgage. Sometimes proceeds from a foreclosure sale aren’t enough to cover what’s owed on the mortgage, which would leave you owing the difference.
Make sure there is a zero balance reflected, and if you are responsible for a shortfall, make arrangements to repay the remaining balance.
Many lenders are willing to settle that “deficiency judgment” for less than what’s owed because it’s better than getting no money at all.
Apply for credit: In particular, apply for different varieties of credit. Have some revolving accounts, typically credit cards, and some installment fixed-payment loans. But be careful. Don’t apply for too much credit at once.
Don’t fall prey: Watch out for credit repair companies that promise to clean up your credit report after paying a fee for the service. The truth is, that no one can remove accurate, negative information from your credit report. It’s illegal. Only the passage of time can assure that negative, but accurate, information on your credit report will be removed.
When it comes to repairing your credit, there are no quick fixes, the experts say. What lenders want to see is responsible financial behavior over time.
Know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has. Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file.
If you are upside down or behind in your mortgage, don't worry. I am a default resolution specialist. Just call me, Lisa Longest at Exit Gold Realty and we will will work together through this. Call me at 443-786-4200.