Losing a home due to foreclosure can leave a heavy mark on your credit record, however, there are things that you can do to re-build a great credit history sooner, making credit availability and even home ownership a real possibility in a shorter timeframe than you might think.
What does a foreclosure do to my credit score?
This Realtor.com article says that a foreclosure can drop a person’s credit score by 100 points — and sometimes more. If your foreclosure happened rather suddenly and you had a good credit score beforehand, losing 100 points off your score might not be so terrible, but if the process of losing your home was preceded by other poor credit handling events, such as bankruptcy or non-payment of debts, your credit score could have dropped into the “bad” range of below 600.
So how does a person recover their credit rating after experiencing a foreclosure? Here are three things you can do to start rebuilding your credit score with positive events, along with some tips for qualifying for a mortgage after you have a foreclosure on your credit record.
Stay current on all existing bills
It’s important as you rebuild your credit after a foreclosure to be sure to pay your bills on time. Showing that you are managing your money responsibly after foreclosure indicates to creditors that you don’t plan on getting behind on your bills again. Make sure that you pay all bills on time or early, even if that means setting up automatic bill pay in order to avoid forgetting to pay bills by their due date.
Use your credit cards
If you have credit cards, use them regularly and pay them regularly. It’s important to work to keep your card balances below 30% of your credit limit and to not have balances on more than one or two cards as well.
By showing that you can use credit responsibly, your credit score should rise somewhat quickly.
If you lost credit card privileges during your foreclosure and still can’t qualify for a traditional credit card, get a secured credit card with a local or national bank, use it regularly and pay it off each month in order to help re-build your credit score.
Don’t apply for more debt
Avoid taking on or applying for more debt if possible. Stay away from auto loans and personal loans and don’t accrue additional credit card debt unless it’s a small amount (under $1,000) in order to show a solid repayment history.
Taking on additional debt in large amounts after a foreclosure indicates to credit bureaus that you’re not opposed to living above your means, which can hinder your credit score from rising.
How long after a foreclosure will I have to wait before I can buy another house?
The rules for home purchase after foreclosure vary between mortgage types. Conventional loans backed by Fannie Mae and Freddie Mac require a seven-year waiting period after a foreclosure.
VA loans – if you qualify – require only a two-year waiting period after a foreclosure. FHA loans are a bit more lenient and will qualify a borrower for a home purchase only one year after foreclosure — provided the borrower can prove that the foreclosure was caused by a catastrophic financial event such as a job loss or a medical emergency that resulted in high medical bills.
Credit unions that offer mortgages can sometimes be more lenient toward previously foreclosed upon borrowers, as can hard money lending firms. There are also a couple of more steps borrowers can take to increase their chance of approval for a home loan after experiencing a foreclosure.
The higher percentage of cash you have saved for a down payment on a home, the more eager a lender will be to let you borrow money for a home purchase after a foreclosure. Work to save up 20%, 30% or even 50% of a new home purchase price during the time that you’re waiting after foreclosure to re-build your credit score.
A healthy savings habit shows a commitment to financial responsibility on the part of the borrower and gives lenders a good reason to take a chance on lending them money again.
Keep your debt-to-income ratio low
Work to stay at a 35% or lower debt-to-income ratio including your projected new house payment. By showing a lender that you intend to stay financially upright by keeping debt amounts low after your foreclosure, you’re indicating monetary responsibility and a desire to avoid falling into a foreclosure situation again.
Building up your credit score, saving money for a down payment and earning the trust of creditors after a foreclosure takes time. Be patient with yourself and with creditors as you work to get back into their good graces after going through a foreclosure experience. With a bit of time and effort, you can re-build your credit after experiencing a foreclosure.