What Happens to my Credit after a Short Sale, Foreclosure, or Bankruptcy?

The economy may be on the mend, but on the mend is a long way from fixed.  Bottom line, it's tough out there for a lot folks, who are saddled with debt, out of work, or dealing with large reductions in at home income. Those issues, combined with the vast drop in real estate values in the past five years are leaving many people in situations where in order to move or sell their home, they will need to have a successful short sale, and more people are undoubtedly going to get foreclosed on.

 

Credit is hugely important issue for folks.  Car loans, Home loans, Credit Card interest rates, even oil delivery contracts all depend on credit.  What happens today with your home will affect your credit score down the road,  and we'll try to take a look at that here.

 

Overview of Short-Sale, Foreclosure, and Bankruptcy

Short-Sale

A short-sale is effectively a charge off of the mortgage.  It is very serious, as the creditor/lender is agreeing to "not be paid back" all of the sum that you have borrowed.  In the end though, you are trying to make the best out of a bad situation, and typically lenders will look at that in the future more kindly than the next two situations. Perhaps not much, but a little.

 

Foreclosure

Foreclosure is when the lender takes your home as collateral for the loan, which they primarily do in the case of non payment.  Like the short-sale, foreclosure will typically result in the lender not requiring you to pay back the

-->

 

debt, but you lose your home, and your credit score will be affected for years.  Lenders typically have to do through all sorts of legal procedures to take your home, many of which they avoid with the short-sale, and it is probably for this reason that foreclosures usually impact your score more negatively and for a longer time than short-sales.

 

Bankruptcy

If you declare bankruptcy (and there are two types), generally, you are not paying multiple creditors what they are owed, or less than what they are owed, or much slower than they require, or all three.  Bankruptcies can stay on your credit for 7 to 10 years, and while they can alleviate some short-term pain, the consequences are severe enough on your credit that it should generally be the last resort.

 

What Are My Options For Getting Financing After A Short-Sale, Foreclosure, Or Bankruptcy

 

FHA, Fannie Mae, Freddie Mac

 

The various government entities have their own standards for when you will be able to borrow for a home again.  In general, FHA is easier than Fannie Mae, and Fannie Mae is easier than Freddie Mac, but since most of us don't know how to reach one of these folks directly, it's generally easier to discuss your credit with a lender and see which programs are the most likely for your situation.  In some short-sale situations, you will be able to purchase a home right away!  For foreclosure and bankruptcy, you'll be waiting 3-7 years, unless you can prove extenuating circumstances.  Everyone's circumstances are different, so if you found your self between a rock and a hard place but your situation is now improved, do make sure you talk to a knowledgeable advisor.

 

Private Financing

The government is not the only one who can offer mortgage loans.  Banks can as well, and this "private" financing can be more flexible than government loans.  Today, this financing is basically non-existent, but historically it returns as the economy strengthens.  Be aware, that the damage to your credit means that even with this private financing you'll be paying higher rates, but it will still be possible to borrow.  A steady payment stream and cleaning up the rest of your credit will probably speed your way to lower rates and cheaper financing.

 

Strategies for Rebounding From a Short-Sale or Foreclosure

Here are a couple of strategies to get back in the game!  Don't hide from your issue - learn the rules of the game and tackle it head on.

 

 

 

1) Find someone who can check your credit and talk to you about what your next steps are.  Mortgage professionals can usually spot the biggest - and the smallest - issues on a credit report.  Fix the ones that can be fixed, and see when you can tackle the next one.  There will likely be points in time where it will make sense to borrow, or engage in an activity (like purchasing a cell phone), as a way to re-establish a positive payment history and get that score moving back up.

 

2) Cash is your Friend.  It's easy to say, but when your credit is bad, cash is king.  Live below your means, if possible, and save cash to buy cars, avoid credit card debt, and build for your next home purchase.  You are more likely to find home financing, both with the government and with private financing, the larger your down payment is.  And with poor credit, borrowing to buy things is just going be so much more expensive than it was before it will take longer than ever to dig out.  Yes, you can find someone to sell you that shiny new car at a crazy high interest rate.  But paying $5000 cash for an older car will be much cheaper over a couple of years, saving you money, both in interest and costs.

 

3) Join a Credit Union.  Credit Unions are local banks that can help rebuild credit, and may offer better rates than other financial institutions, since they typically are tied in with your income as well through direct deposit.

 

 

Do Good Things Today! Matt Heisler