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Credit repair after foreclosure
All hope isn’t lost after foreclosure. Find out how to rebuild your credit and get another mortgage.
A foreclosure can be a devastating blow to your credit, but it doesn’t mean you’ll never be able to buy a home again. With the right steps, you can build your credit score and apply for credit, loans and even a mortgage. Learn how a foreclosure affects your credit score and what you can do right now to start repairing your credit.
How does a foreclosure affect your credit score?
A foreclosure can lower your credit score by as much as 160 points. If you already have blemishes on your credit report, such as repossessions, tax liens or bankruptcy, a foreclosure could affect your credit more significantly than if your credit score was in good condition. In either case, you likely won’t be able to apply for a mortgage loan for three to seven years after a foreclosure, depending on your circumstances.
9 tips for credit repair after foreclosure
All hope isn’t lost after foreclosure, though. Use this time to take a closer look at your finances so you can work on repairing your credit and planning for the future. Follow these steps to repair your credit after foreclosure.
- Keep accounts paid to date
Don’t fall behind on other payments just because you’re going through a foreclosure. Staying up to date on all other bills will help to pad your credit score and show future lenders that you’re able to make payments on time.
- Keep old accounts open
Using credit cards and paying off loans are some of the quickest ways to boost your credit score. So, keep your old accounts open and pay down your debt to show creditors that you’re able to manage your money and use credit wisely.
- Identify the cause of the foreclosure
Before you can fix a problem, you have to know what caused it in the first place. Assess your finances and spending history to figure out what caused your missed mortgage payments. Did you go through a job loss, divorce or medical issues that made money tight? Was it because of a miscalculated debt-to-income ratio? Identify the problem, then work toward fixing it to avoid another loan default.
- Get professional help
Credit counselors can help you make a budget and debt management plan, and they can also negotiate lower interest rates on existing loans. However, be cautious of working with debt settlement companies that suggest you purposely stop paying your current debts so that they can settle them, as this could make your credit even worse. Instead, choose reputable, certified credit counselors who works with you to better manage your debt and rebuild your credit.
- Apply for a secured credit card
If you don’t already have a credit card, getting one and diligently making payments on it can help to rebuild your credit. If your foreclosure is keeping you from getting approved for a regular credit card, apply for a secured credit card. These cards require a deposit, have a low maximum spending amount and often don’t require a credit check.
- Don’t take out new loans
While getting a secured credit card can help you rebuild your credit score, taking on a new car loan or personal loan isn’t a good idea right now because it increases your debt-to-income ratio. Work on paying down your existing debt before applying for new loans.
- Adjust your spending habits
Take a closer look at your bank statements and see if there are ways you can trim down on spending. For example, spending $5 each workday on a cup of coffee adds up to $100 a month that could be put toward paying off debt or into savings instead.
- Save money
While rebuilding your credit, try to save as much money as you can. This way when you do go to buy a house again, you’ll have a hefty down payment saved, which can up your odds of being approved for a mortgage. Plus, the more money you put down, the less you’ll have to finance.
- Give it time
Repairing your credit after foreclosure takes some time, so try to be patient and focus on the improvements you can make to better your credit in the meantime. It might seem like a daunting task, but with time and planning, getting good credit back after foreclosure is absolutely possible.
When can I buy a house after a foreclosure?
It depends on your individual circumstances and the type of loan you’re applying for. For conventional mortgages backed by Fannie Mae and Freddie Mac, you’ll have to wait a minimum of three years if an extenuating circumstance — like a job loss, divorce, medical emergency or other major life event — caused you to miss mortgage payments. Otherwise, you’ll have to wait seven years before being eligible for this type of loan again.
You could get an FHA loan as soon as one year after foreclosure if you can prove that an extenuating circumstance was the cause. VA loans typically require that you wait two years after foreclosure to apply for another mortgage. If you’re borrowing from a credit union that offers mortgage loans, you may have more flexibility when applying for another mortgage after foreclosure.
Start your credit repair journey with these services
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Nobody goes into buying a home expecting a foreclosure to happen, but the reality is that many people will experience one. If you’re going through the process, know that this blemish on your credit report won’t stay with you forever. It’s possible to buy another house down the road if you take the necessary steps now to rebuild your credit and shore up a realistic budget and debt management plan.
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