Improving your credit after foreclosure is a step that is absolutely necessary. Foreclosure is one of those credit issues that has far-reaching effects on almost every area of your life. The sooner you can get back on the right track, the closer you will be to restoring your life back to something that looks like normal.
Why You Need to Improve Your Credit After Foreclosure
A foreclosure is up there with bankruptcy as a heavy derogatory entry on your credit report. It can cause your credit score to plummet by more than 100 points. Worse, if you had very good or excellent credit before the foreclosure, the drop in your credit score can be much more severe.
Since a foreclosure is considered to be such a fundamental negative, any other bad credit that may also appear on your credit report can collectively have a very dramatic effect. You could see your credit score dropped from say, 750, down to 550 or even less.
A credit score that low could force you to pay subprime loan rates and terms on any loans that you are able to obtain. However it can also put you in a position of not being able to get any credit at all. This will almost certainly be true in the months and years immediately following the foreclosure.
The foreclosure entry will stay on your credit report for seven years. That will give you little room for a additional negative credit after the fact, since it will be combined with the foreclosure, punishing you even more for the more recent late payment or collection.
Foreclosure is a Big Negative
One of the fundamental problems with a foreclosure is that it has an effect on your ability to obtain housing. Naturally, a mortgage lender will have to consider the foreclosure in evaluating whether or not to grant you a new home mortgage.
On FHA loans, you may be able to get a new mortgage in as little as one year. But that will only be permitted if the foreclosure was the result of circumstances beyond your control. That can include long-term unemployment or a medical catastrophe. You will have to fully document whatever the cause was. But if it was caused by simply being too deep in debt overall, they may require several years to pass before you can get a new mortgage.
Conventional mortgages will be even more difficult to get with a foreclosure on your record. It may take up to seven years before you are able to get conventional financing again. However you may be able to do it in less time if you can prove that the foreclosure was the result of a hardship.
But mortgage financing aside, it can also be very difficult for you to rent a house or apartment. Since you will be making a house payment to a landlord, he or she may be uncomfortable leasing to you since you had trouble making your house payment in the past.
Deed in Lieu of Foreclosure
If the foreclosure was voluntary, meaning that you offered the deed in lieu of foreclosure, there can be little difference in how it is reflected on your credit report, even if the lender accepted the deed in full satisfaction of the mortgage.
In the eyes of most lenders, both an involuntary foreclosure and a deed in lieu of foreclosure represent a default on a mortgage. From a standpoint of credit criteria, they will usually see very little difference between the two.
Short Sale of Your Home
A short sale is where you sell your home for less than you owe on the mortgage. The lender agrees to accept a reduced amount in order to release the lien on the property and enable the sale to go through.
While that enables you to sell the property and to get out from making the mortgage payments, it will have a similar impact on your credit as an outright foreclosure.
However, a short sale comes with tangible complications. Even if the lender approves the short sale, they may issue an IRS form 1099 for the amount of the unpaid loan proceeds. This is referred to as forgiveness of debt, and it’s fully taxable. (There are exceptions, and you will need professional assistance in order to identify and take advantage of them.)
But there’s an even more unfortunate outcome involved in a short sale. A lender may come after you for the amount of the loan deficiency, even well after the fact. Say for example that you owed $200,000 on your house, but sold it for only $150,000. The bank can pursue you for the $50,000 shortfall.
Why You May Need Professional Help in the Aftermath of a Foreclosure
As you can see, defaulting on your mortgage, whether through foreclosure, deed in lieu of foreclosure, or a short sale, is a particularly messy credit problem. You will almost certainly need legal help in dealing with the credit fallout after the fact, as well as with potential lingering liabilities.
As well, most people go who through foreclosures have other credit problems along the way. This is often the result of unsuccessful attempts to save the house from foreclosure. It can lead to a long trail of poor credit.
If you have lost your house, the implications can be far-reaching. You’ll need to act and to do so quickly. You should get help in repairing and rebuilding your credit as soon as possible. Your life may not be normal until you do.