We research, you save.
Got Questions On Rates? (855) 610-2972

Rebuilding credit following a foreclosure

There's good news and bad credit news for those enduring a foreclosure.

First, the bad news: Foreclosures have a devastating impact on your credit score.

The offsetting good news is that the impact will not last forever, and there are steps you can take almost instantly to begin rebuilding your credit score.

Foreclosures kill your credit

"It's a pretty serious hit," says Rebel A. Cole, professor of finance at DePaul University's College of Commerce, noting it's not unusual for a foreclosure victim to watch helplessly as 100 to 200 points are slashed from their credit score.

If, for instance, your credit score went from the low 700s to the high 500s, "that's sub-prime," says Cole. "You're not going to be able to get credit very easily. It will be very difficult [at that level] to get anything other than secured credit."

Foreclosures stick for a long time

A foreclosure can stay on your credit report for up to seven years, says Maxine Sweet, vice-president of public education at the Costa Mesa, Calif.-based credit bureau Experian. "At that time, it will be automatically erased," she adds. Distressed homeowners can also get out from under their homes by a deed in lieu of a foreclosure and by pursuing a short sale.

"When you do a short sale, you close out the loan for less than you agreed to pay originally, and so that's a settled account," Sweet says. "That account is reported as being settled rather than being reported as foreclosure."

How to rebuild your credit

Many like to talk about the idea of "repairing" a credit score after a foreclosure. But the words "repair" or "repairing" are misnomers in this context, Sweet says.

"That implies you will undo what you've done," she explains. "You have to start from this point forward rebuilding your credit."

The most important thing you can do to rebuild your credit score is to manage credit without spending more than what you can pay each month, Sweet says.

"More important than improving your score is getting your spending under control. The best way to rebuild your credit score is to use your credit card regularly, and pay in full each month, so you're demonstrating you are in control, you can manage risk, and you're not a risk to the card companies. That will start adding positive points to your credit history each month."

As an example, she cites folks who started with a mid-range credit score of 650 to 700, then went into foreclosure. If they actively used credit and paid it off each month, they were able to return their credit score to earlier levels in nine months.

"If you aren't doing that, and you stop using credit, you've frozen your credit history in a negative state," Sweet says. "There's nothing to offset this negative history. You overcome that by using credit in a 'credit smart' way."

Credit utilization

The second most important factor in determining a credit score is how much is owed on credit cards compared with on the amount of one's credit limit, a ratio known as credit utilization.

If cardholders have unpaid balances on their credit cards, they can start paying down the balances and increasing the amount of unused credit they have.

"It's a sign of high risk when someone is charged to the max on their credit cards," Sweet says, noting that reducing the amount owed on cards is "one of the very, very specific things they can to do rebuild their credit scores."

One final word of wisdom to those facing foreclosure: If you can get into a loan modification without missing a mortgage payment, you will avoid a black mark against your credit score.

Unfortunately, though, before most people can get into a loan modification, they have either missed payments or have found the modification program forces them to miss payments, Sweet says.

"But still, a missed payment does not have as serious an impact on your credit score as a foreclosure," she adds.

Related articles :

More help from HSH.com

  • Can I refinance an FHA second property through HARP?

    You should know that lenders are free to do their own "overlays" as to which programs and borrower criteria they will write loans for.
  • Advantages of a FHA mortgage in 2016

    FHA loans have become more affordable in 2015, thanks to a drop in the annual mortgage insurance premium that the Federal Housing Administration charges.
  • 10 metros where a home costs about $1,000/month

    HSH.com identifies 10 metro areas where you can afford the principal, interest, taxes and insurance payments on a median-priced home for only around $1,000 per month.
  • HSH.com on the latest move by the Federal Reserve

    The Federal Reserve concluded a meeting today with no change to the federal funds rate and no changes to other monetary policy tools.
  • Mortgage Rates Radar 09/13/2016: Despite Fed concern, mortgage rates holding steady

    HSH.com releases its latest Weekly Mortgage Rates Radar showing a slight increase in popular mortgage rates during the seven-day period ending September 13, as concerns that the Federal Reserve may make a move at next week's meeting have to buffeted the financial markets of late.  The Weekly Mortgage Rates Radar reports the average rates and points offered by lenders for the two most popular types of mortgages, the conforming 30-year fixed-rate mortgage and the conforming 5/1 adjustable-rate mortgage (ARM).