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Picking Up the Pieces After a Foreclosure

credit-score-going-upForeclosures are never a positive matter, but to all of the former homeowners out there who had their homes foreclosed upon: keep your head up because all is not lost.  With time, diligence, and adequate research, there are plenty of ways to rebuild oneself after a foreclosure has taken place.  The first thing to do is to stay calm and face the reality of the situation, and then assess all possible solutions.

Find an affordable place to live:  The first step to take after a foreclosure is to get settled back into a living situation within your financial means.  Once you are in a stable living situation, you can then focus on rebuilding your credit without having to worry about staying warm at night with a place to eat, sleep, and bathe.  There are rental options out there, even for people who have had a foreclosure.  The Freddie Mac REO rental initiative will give “qualified families living in recently foreclosed eligible properties acquired by Freddie Mac the opportunity to sign a new month-to-month lease with Freddie Mac, allowing them to stay until they can find a new place to live or the home is sold” according to the Freddie Mac website.  Of course, the homes are required to be in good condition as well as meet health and safety standards as inspected by business partners of Freddie Mac.  Tenants must be able to show their ability to pay market rent on the property, pass a background check, sign a property-condition disclosure at inspection and allow contractors to repair deficiencies in the property, if necessary, and lastly to cooperate with marketing activities through allowing the property to be shown to perspective buyers and real estate agents as well as keep the home clean and safe.  If your home is not a Freddie Mac home, it won’t hurt to ask your lender if they would allow you to rent back the home you lost to foreclosure.  By staying, it would allow you and your family to stay in the house while you search for a new place to live.

If the bank does need you to vacate the property, ask about programs that can help you access the funds for relocation, because some lenders seek to provide financial incentives in return for the foreclosed property being left quickly and in good condition (Freddie Mac).  For a rental property within your means, be aware that the property manager may require a higher-than-usual security deposit as foreclosed borrowers have questionable credit scores, which we will get into next.  Other factors that may help you get into an affordable rental property are to get friends and colleagues to write a letter of recommendation on your behalf, or get a co-signer on your lease.  The United States Department of Housing and Urban Development (HUD), and other federal agencies may also be able to provide assistance.  For immediate need, see www.hud.gov/homeless/ for shelter, food, counseling, or job skill programs.

Focus on rebuilding your credit: A foreclosure can have a substantial negative impact on your credit score, thus making it much harder to get back up after being kicked down.  However, in time there are many things that one can do to get their credit score back up to par and on a broader scale to help people regain control of their finances.  The number one rule of thumb when it comes to raising ones credit score is to pay any and every bill on time, at least with the minimum amount due.  To make this more manageable, try to eliminate unnecessary costs and also focus on completely paying down one debt at a time.  For example, if someone has multiple credit cards each with outstanding balances, make sure to pay the minimum amount due on each account and filter more than the minimum amount due into one account until the remaining balance is at zero.  Continue doing this until all credit cards stand at zero balance.    This also maintains focus on paying off debt rather than simply moving it around to other accounts.  With that being said, try to limit the amount of credit accounts you have, and certainly do not apply for lines of credit that are not completely necessary.  Any loan rate shopping should be done within a short period of time, as multiple credit inquiries can eventually taint ones credit score.

Lastly, place heavy focus on your credit report.  A free copy of your credit report may be attained at www.annualcreditreport.com.  It is crucial to study this document and look out for any errors.  The protocol for fixing an error on a credit report can be found on any one of the three credit reporting agency websites: TransUnion, Experian, and Equifax.  Many credit repair matters can be taken care of with diligence, and it is not always necessary to turn to credit repair companies.  These companies may also turn out to be fraudulent, so if you have an issue, take matters into your own hands.

Create a Savings Plan: After a foreclosure, a borrower needs to really prove themselves to lenders going forward to show that they will not be responsible for a foreclosed property once again.  First and foremost, this means using a hefty down payment for your next property, which ultimately means adequate savings.  This also applies outside of homeownership; as we discussed earlier, foreclosures result in a significant blow to your credit report, which means that applying for anything such as an auto loan, apartment housing, or bank account may require you put down a higher down payment/security deposit, so make sure that you are achieving this goal.  The first thing to do when creating a savings plan is to thoroughly analyze your financial situation.  Determine monthly net income after taxes and other payroll deductions – this is your cash on hand.  Then, factor in all of the fixed costs such as loans, minimum credit card payments, rent, utility bills, etc.  After that’s all done, account for food and gas costs and budget accordingly.  See where you have room to deduct any of these payments.  Sometimes it can be as simple as calling up a credit card company and asking for a lower interest rate, or calling the bank and asking how to avoid standard checking account or ATM fees.  Otherwise, see where you can limit spending on groceries and gas.  Eating out vs. cooking for yourself is a big no-no when it comes to savings.  One of our Broadview Mortgage Branches posted an interesting link on Facebook detailing just how much more it costs to eat out instead of cooking.  See it here for the painful truth: it is time to cut out eating out.  Set money aside for predictable expenses i.e., haircut every two months, school supplies before school starts, clothing at the beginning (or ending) or every season.

Now that all of your future expenses are noted, compare your income (again, after taxes and deductions) with your expenses and brainstorm ways to increase income and decrease spending.  Establish short and long term goals.  Great short term goals are to get to 3-6 months worth of expenses in savings, and great long term goals are to start saving for a down payment/security deposit and retirement.  On top of a savings account, keep an emergency fund that can be used without jeopardizing monthly expense funds.  Lastly, do not make impulse purchases!

Waiting Period:  On top of all of these suggestions, time is always a factor for homeowners who had a foreclosed property in their name and are planning on buying again in the future.  The waiting periods vary depending on the loan program chosen, and they are as follows:

VA loan – 2 years

FHA loan – 3 years

USDA loan – 3 years

Jumbo Loan – 7 years

Conventional Loan – 7 years

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