If you can no longer make your monthly mortgage or home equity payment, the lender has the right to foreclose on your property. Essentially, the lender takes your home, which is the collateral (or backing) for the loan, then sells the property to repay what you owe.Millions of Americans have gone into foreclosure in the past decade. They have lost their jobs, used up their savings, and in the end have had to hand their home back to the bank and move out.The foreclosure rate reached its peak in 2010, just after the financial crisis of 2007-2009. Since then, the rate has steadily fallen.
Foreclosure is devastating to homeowners and their families.;And, it leaves a lasting impression on a foreclosed homeowner’s credit history and credit score. Other than a bankruptcy, foreclosure is the most negative piece of information you can have on your credit score. Often, homeowners who fall into foreclosure will have months of late payments and unpaid property taxes listed on their credit report.
The Federal Housing Administration (FHA), Fannie Mae, and Freddie Mac each set a minimum time that must elapse before a borrower who experienced a foreclosure or a bankruptcy or other adverse event is eligible for a new loan.
For foreclosures, Fannie Mae and Freddie Mac set a seven-year waiting period, measured from the completion date of the foreclosure action.
This period can be reduced to three years if extenuating circumstances are present. The FHA used to have a three-year waiting period. However, as a result of the housing market recession, it adopted the Back to Work Extenuating Circumstances program , which reduced the waiting period following foreclosure to a year if a borrower could prove the foreclosure stemmed from an external economic event such as loss of employment.
Consumers who have gone through a bankruptcy also face a waiting period before lending is permitted. Fannie Mae and Freddie Mac require four years for a chapter 7 or 11 bankruptcy, and two years after the discharge date (or four years from the last dismissal date) for a chapter 13 bankruptcy. Those who have multiple filings (more than one over the preceding seven years) have a five-year waiting period. With extenuating circumstances, the waiting period after a bankruptcy can be reduced to two years.The FHA also has a two-year waiting period, which can be reduced to one year if extenuating circumstances are present.
In general, having a lower credit score (under 675) makes it more difficult to get credit cards and car loans. If you do get the loan, you will typically pay higher interest rate and additional fee.
It takes a long time for a consumer’s credit score to recover from the impact of a foreclosure—far longer than the seven years the foreclosure remains on the credit report. The most important impediment to pursuing home ownership after experiencing a foreclosure has been a tightening of the rules, regulations, and practices surrounding approval for mortgage loans. The tighter credit box has made it exceedingly difficult for individuals to recover from their past financial misdeeds and has contributed to the slow nationwide recovery
Foreclosures and negative public records can appear simultaneously on a consumer’s credit report.
Here,s the hard fact.Many consumers who went through a foreclosure also experienced at least one negative entry on their public records including instances of bankruptcy,civil judgement,unpaid government debts and tax liens either singly or as a combination of two or more.
The number of new foreclosures and adverse records peaked in 2010. The highest number of foreclosures in a single quarter, 325,000, occurred in the second quarter (Q2) of 2010; there were 1.1 million foreclosures during all of 2010. Before the crisis, the number of new adverse public records was running about 450,000 per quarter.
Although the incidence of new foreclosure and adverse public records peaked in 2010, the cumulative number of consumers with adverse events still on their credit record actually peaked around 2015. At that point, 5.7 million consumers had had a foreclosure and 22.1 million consumers had had an adverse public record within the preceding seven years. That 27.8 million consumers had blemished public records as of 2015 partly explains the slow recovery after 2010.
By the third quarter of 2016, 26.8 million borrowers still had negative public records. These credit blemishes will persist for many years. A large number of consumers will retain adverse events on their records for a considerable time, making it hard for many of them to borrow again.
In the end of 2018, 22.8 million consumers—almost 9 percent of the adult consumer population—still had a foreclosure or adverse public record.
Middle-aged consumers were hit hardest by these credit blemishes. The middle-aged consumers hit hardest by these adverse credit events have had a profound impact on the home ownership rate because their age group has the strongest preference for home ownership.
The concent ration of these credit blemishes varies widely by region. Nevada tops the list for foreclosures: 5.2 percent of its adult consumer population have experienced a foreclosure.
Long judicial foreclosures may have extended the negative impact of credit blemishes. The long judicial foreclosure process in some states might have contributed to the extended impact of negative events on consumers, particularly at the peak of crisis, when a foreclosure surge caused filing bottlenecks.
But there is some good news. Although a foreclosure can remain active on your credit report for seven years, it won’t ruin your credit score forever. If you keep up with the payments on your other credit obligations, such as auto loans and credit cards, your credit rating can begin to rebound in as little as two years, although it may take a full seven to ten years to reach the level it was at before your foreclosure, according to a study by FICO.
It’s important to remember that a foreclosure is a single negative item; if you keep it isolated by paying the rest of your bills on time and staying out of debt, the climb back up will be much shorter.
With patience and hard work, it’s also possible to secure a home loan again. The Federal Housing Administration (FHA) will allow a new mortgage to be approved if a past foreclosure is more than five years old and everything else is in order. Re-establishing good credit takes time and careful planning. As you recover, consider prioritizing your spending and preparing a budget—then stick to it.
What should you do to re-build your credit score?
You may not be able to buy a new house tomorrow, but if you want to be a homeowner again in the future, it is possible. Typically, you will need to wait several years after a foreclosure to qualify for a new mortgage. In the meantime, it is a good idea to work on improving your credit score and paying down your debt – regardless of whether or not you had a foreclosure in your past, it is generally easier to get a mortgage if you have a good credit score and low debt load.
Investigate into your Deficiency Balance.
The deficiency balance is the difference between the balance remaining on your mortgage and what the lender is able to get for the property. So if you owed $325,000 on your mortgage and the house sold for $200,000, you would have a deficiency balance of $125,000. Whether or not you are responsible for paying the deficiency balance depends on what state you live in. However, even in states with anti-deficiency balance laws, you may only be protected if the home was your primary residence and the mortgage was used to build or purchase the home. If the lender is allowed to collect the deficiency balance, it is possible that you will be sued and your wages garnished.
You can apply for a hardship exemption to stop garnishment, although this can be difficult to get. Filing for bankruptcy is another way to stop garnishment, but it will further damage your credit report. It is also possible that the lender may be willing to set up a payment plan or forgive the deficiency balance. In general, the IRS considers forgiven debt income, and requires you to pay taxes on it. However, under the Mortgage Forgiveness Debt Relief Act, you do not have to pay taxes on a forgiven deficiency balance.if the home was your primary residence and the mortgage was used to build, purchase, or improve the home. (Refinanced mortgages are covered to the extent of the balance on the original mortgage at the time of the refinance.)
Budget it right.
Few people want to struggle to meet their monthly obligations. So what you do to make bill-paying easier in the future? Regardless of whether you are a millionaire or making minimum wage, the foundation of financial success is the same – budgeting. Budgeting means analyzing what you have coming in, then developing a reasonable and goal-oriented plan for what goes out.
If you don’t know exactly to the penny what you are spending on groceries, clothing, or other items, don’t fret. Just put down your best estimate for now. By tracking your expenses for a period of time (you can use the Tracking Worksheets or a computer spreadsheet), you can – and should – create a more accurate budget in the future. Don’t forget to include debt payments and savings. For periodic expenses, such as vacation, determine the annual amount and divide by twelve.
Though no two budgets are alike, there is a common rule: expenses should never exceed income. If you are currently spending more than you are earning, think about ways you can increase your income and/ or reduce your expenses. Can you get a part-time job? Cut back on dining out? Skip the daily $4 mocha latte? Get a cheaper cable package or cut your land-line phone? Increasing income can be difficult, but most people have some expenses they can trim. Honestly assess what is a necessity and what isn’t. List the changes in the proposed column of the budget worksheet. Your budget is only helpful if you follow it. Tracking your expenses on an on-going basis can help you recognize when you should stop spending because you have reached your limit in a particular category. However, if you overspend once in a while, try not to get discouraged. No one is perfect. If it happens often, you may need to adjust your budget so that it is more realistic. For example, perhaps you can’t keep your food costs at $150 a month, but you can cut back on your clothing purchases.
Savings is a good idea
You probably don’t want to think about the troubles that could occur in the future, but unfortunately, bad things can happen to good people – more than once. Should you be hiding under the covers, shaking in fear? No. But it is a good idea to do what you can to prepare. One of the best things you can do to prepare for the unexpected is to save. With savings, you don’t have to put car repairs or medical bills on your credit card or worry about how you will pay your rent or electric bill if you lose your job.
Financial experts recommend establishing emergency savings of at least three to six months worth of essential living expenses. If you do not already have that amount, determine how much you can set aside each paycheck until you reach your goal. Since you don’t know when you will need the money, make sure that it is put in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice. Set yourself up for success by making saving an automatic process. If you have direct deposit through work, you should be able to have a portion of your paycheck deposited into your savings account. If not, many financial institutions allow you to set up a periodic automatic transfer of funds from your checking account to your savings account.
Build your Credit Report
All of your credit activity is tracked by your credit report. It includes the payment history and balances owed on credit and store cards, personal loans, student loans, car loans, and mortgages as well as credit-related legal activity, such as foreclosures, repossessions, evictions, judgments, and bankruptcies. Your credit score is a numeric rating of the information in your credit report and is designed to measure the risk you won’t repay what you borrow. Having a good report and score makes it easier to obtain credit, rent an apartment, and even get low rates on insurance. Experiencing a foreclosure severely damages your credit report and score. However, the damage does not have to be permanent – there are many things you can do to improve your report and score in the future:
• Pay on time, every time – Do you have credit cards, car or student loans, or other debt? A commitment to always pay on time is one of the most powerful steps you can take to improve your credit rating.
• Pay down your debt – Having a large debt load will lower your score. If you have balances on credit cards or loans, explore ways you can lower your interest rates and free up cash to make more than the minimum payments. Try to avoid charging more on your credit cards than you can pay off in full the next month.
• Dispute errors – Many credit reports contain mistakes. Perhaps someone else’s collection account appears on your report, or you were marked late on a credit card you always pay on time. That is why it is a good idea to periodically review your credit report from each of three credit bureaus: Equifax, Experian, and TransUnion. You can get a free copy of your credit report annually from the Annual Credit Report Request Service (www.annualcreditreport.com, 877-322-8228). If you see any errors, contact the relevant credit bureau and dispute them. • Be patient – Most negative information, including a foreclosure, can stay on your credit report for seven years. The more recent the information, the more of an impact it has on your credit score, so over time, the foreclosure will become less significant.
• Get credit – In order to have a good credit score, you need to have some sort of credit and use it responsibly. If you have no credit now, you may want to apply for a credit card. For people with a low credit score, a secured credit card (which requires you to put down a deposit that the creditor gets to keep if you do not make payments) is generally easier to get than a regular credit card. The credit limit is usually low, and the fees can be high, but many creditors are willing to convert a secured credit card to a regular credit card after a year or two of on-time payments. Another option is to ask a friend or family member who has a good credit history to cosign for you.
Keep track of prevailing Debts
Many people let other debts fall to the wayside when they are struggling to pay their mortgage or use credit to help keep them afloat. It is perfectly understandable if your credit cards were not the first thing on your mind when you were facing the prospect of losing your home. However, after experiencing foreclosure, you may be in a better position to tackle your debt. The first step is to establish an accurate inventory of who and how much you owe. If you have a stack of unopened bills on your kitchen table, take a deep breath and open them. If you don’t have recent statements, call your creditors and ask them for up-to-date account information.
Keep your accounts in good standing
If you have accounts that you were able to keep current, they don’t require any urgent action. However, keep in mind that if you owe a significant amount and only pay the minimum required payments, it could be years before you are debt free.
You should only do this if you are comfortably meeting your all of your debt and other obligations. If you have multiple accounts, it is better to be systematic and focus your extra payments on one creditor at a time instead of sending a little extra to everyone. Many people like to start with the debt with the lowest balance because it can be paid off the soonest, providing a sense of accomplishment that makes it easier to keep going. However, you will save the most money by starting with the debt with the highest interest rate.
Once the first debt is paid off, put that money toward the debt with next lowest balance or highest interest rate (depending on the option you choose) and so and so on until all of the debts are paid off.
Debt repayment can also be accelerated by finding ways to lower your interest rates. Want to know a simple way to get a lower rate? Just call your creditors and ask. They may say no, but it only takes up a few minutes of your time.
Another option is a debt management plan, in which many creditors give you a lower rate in exchange for closing your accounts and going through counseling. Debt management plans are offered by credit counseling agencies, such as CCCS.
Avoid using a debt settlement agency – it is not the same thing. Debt settlement agencies typically charge high fees and wait for your accounts to become severely delinquent before offering settlements. Delinquent accounts (not with a collection agency) It is a good idea to tackle any account you are delinquent on right away. If you fall far enough behind, it is possible it will be charged off and sent to a collection agency, which will severely damage your credit report. (This typically happens after 4-6 months of non-payment).
When you fall behind, usually the payments you miss are added to your minimum required payment. You may be wondering how you can catch up if your creditor is expecting $1,000. Keep in mind that the payment listed on your statement is not necessarily the only option. Most creditors want you to pay your bills and are willing to work with you. Give them a call and ask if it is possible to pay the back amount over a few months. You can also see if they are willing to settle the debt for less than the amount owed.
Typically, when you settle, you must pay the amount all at once or within a short period of time, so it is more practical for smaller debts than larger ones. When dealing with a creditor, if you don’t succeed at first, don’t give up. Ask to speak to a supervisor. Call back at another time. Send a letter. (Make sure to send it to the address for billing inquiries and concerns, not the payment address.) Ultimately, the creditor may not agree to anything, but at least you will know that you tried your best. Collection accounts.
Once an account goes to a collection agency, the damage to your credit report has already been done. Paying off collection accounts shouldn’t be your number one priority, but it is not a good idea to permanently neglect them either. You probably don’t want to be worried about bill collectors breathing down your neck, and you could be sued for not paying a debt. Collection agencies are usually very willing to settle debts for a fraction of the amount owed. You should always get a settlement agreement in writing before sending a payment. Although they are not required to do so, as part of the settlement agreement, you can ask them to remove the collection account from your credit report. At the very least, they are required to report that the account was paid.
Check your credit report a month or two after settling to make sure they did.
(If not, you can submit proof of payment to the credit bureau.) Most collection agencies will also accept monthly payments. Even if they say they won’t over the phone, chances are, they’ll cash your check instead of throwing it in the trash. Since you may not receive statements from a collection agency, it is very important to keep your canceled checks or other proof of the payments you made.
Keep in mind that while sending monthly payments may be enough to satisfy them, it is possible to be sued as long as you have an outstanding balance and the statute of limitations has not expired. (The statute of limitations is the amount of time that a creditor has to pursue legal action against you to collect a debt. It varies from state to state.)
Losing your home may be one of the most difficult things you experience in your life, but remember, you can rebuild – there is life after foreclosure.