Repairing Your Credit After Foreclosure

Homeowners going through the painful process of foreclosure will also be faced a significant dip in their credit score. This reality is inevitable, but by taking the following steps sooner rather than later, homeowners can begin to rebuild their credit history, making the possibility of purchasing a new home in the future a possibility.

How Foreclosure Affects Your Credit Score

Foreclosure can result in a 100 point drop or more in your credit score. If you’ve had additional financial difficulties aside from foreclosure, such as bankruptcy or non-payment of debts, your credit score may be below the “bad” range of 600.

According to Experian, a global leader in consumer and business credit reporting, “A foreclosure remains on your credit report seven years, so it will have a long-term effect on our creditworthiness. But, because negative information is deleted eventually, you can rebuild your creditworthiness if you take control of your debts and build a history of positive payments that will continue to appear after the foreclosure disappears.”

Pay Current Bills On Time

Demonstrating financial responsibility is key when trying to rebuild your credit history. One way to achieve this is by paying bills on time, which shows creditors that you’ve made positive changes to your situation. Setting up automatic bill pay through your bank will also avoid missing payment due dates.

“Your payment history – whether you have paid your bills on time or late – has the greatest impact on credit scores. It typically accounts for between 30 percent and 40 percent of the total,” says Experian.

Use Credit Cards

Since cash payments don’t register on credit reports, it is important to have credit cards that you use and pay regularly. By switching buying all your essential purchases with a credit card and then paying the balance each month, or at least keeping your card balance below 30% of your credit limit. It also important not to use more than one or two cards since outstanding balances on several cards can also have a negative impact on your credit rating.

Using credit cards responsibly will result in a rapid increase of your credit rating, however if you’ve lost credit card privileges due to foreclosure, you can get a secured credit card with a local or national bank, where you pay the balance each month to begin to repair your credit history.

“Reducing your balances on credit cards and other revolving credit accounts is likely the better option to improve your credit utilization rate, and, subsequently, your credit scores. Consistently making on-time payments against your debt will also help you build a positive credit history, which can have additional benefits for your credit history and, by extension, your credit scores, too,” says Experian.

Avoid More Debt

When rebuilding your credit history, it is important not to take on additional debt. Avoid auto and personal loans, as well as new credit cards in order to ensure you don’t clutter your credit report with more debt. Additional debt will indicate to credit agencies that you’re unable to leave within your means, which will have negative repercussion on your report.

“Applications for credit show up as inquiries on your credit report, indicating to lenders that you may be taking on new debt. It may be to your advantage to use the credit you already have to prove your ongoing ability to manage credit responsibly,” says Experian.

Buying a Home After Foreclosure

The ability to buy a home after foreclosure depends on the type of mortgage you apply for. Loans backed by Fannie Mae and Freddie Mac cannot be approved until seven years after a foreclosure.

VA loans, on the other hand, only require only a two-year waiting period after a foreclosure. FHA loans allow qualified borrowers to buy a home a year after foreclosure if the borrower can show the foreclosure was due to a temporary setback, such as job loss or illness.

Credit unions and hard money lenders that offer mortgage loans also tend to be more lenient towards foreclosed upon homeowners.

According to Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, “If you’ve had this event, you’re most likely to get a loan if you understand why it happens, and you’ve taken steps to make sure it doesn’t happen again. Whatever you did wrong, you need to set yourself up so that it doesn’t happen again.”

Start Saving Money

While your credit score is recovering, it is wise to begin saving money for a new home purchase in the future since most banks will look favorably upon borrowers who have upwards of 20% saved for a down payment.

According to Gregory Erich Phillips, a mortgage loan officer and real estate expert, “Lenders and mortgage insurers want to verify that you have the savings to help prevent a future financial problem. Saving for a down payment is one of the ways you can show that you are financially responsible. FHA loans do offer another option with a smaller down payment (3.5%).”

Maintain Low Debt-to-Income Ratio

It is important to maintain a 35% or lower debt-to-income ratio, which includes your expected new mortgage payment. Keeping your debt low after foreclosure goes a long way when it comes to proving fiscal responsibility to a bank or mortgage lender.

To calculate your debt-to-income ratio, “You need to determine your monthly gross income first. That’s your income before taxes, not your take-home pay. Then determine what your monthly debt payments are. Be sure to include credit cards, auto loan, mortgage, etc. Then simply divide your total debt payments by your monthly income gross,” according to Credit.org, a non-profit agency.

It is also important to exercise patience while your credit score improves. “Know that time is your friend, as the farther you move away from the financial distress, the less negative impact it ha. Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file,” says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling.

Repairing Your Credit After Foreclosure

Homeowners going through the painful process of foreclosure will also be faced a significant dip in their credit score. This reality is inevitable, but by taking the following steps sooner rather than later, homeowners can begin to rebuild their credit history, making the possibility of purchasing a new home in the future a possibility.

How Foreclosure Affects Your Credit Score

Foreclosure can result in a 100 point drop or more in your credit score. If you’ve had additional financial difficulties aside from foreclosure, such as bankruptcy or non-payment of debts, your credit score may be below the “bad” range of 600.

According to Experian, a global leader in consumer and business credit reporting, “A foreclosure remains on your credit report seven years, so it will have a long-term effect on our creditworthiness. But, because negative information is deleted eventually, you can rebuild your creditworthiness if you take control of your debts and build a history of positive payments that will continue to appear after the foreclosure disappears.”

Pay Current Bills On Time

Demonstrating financial responsibility is key when trying to rebuild your credit history. One way to achieve this is by paying bills on time, which shows creditors that you’ve made positive changes to your situation. Setting up automatic bill pay through your bank will also avoid missing payment due dates.

“Your payment history – whether you have paid your bills on time or late – has the greatest impact on credit scores. It typically accounts for between 30 percent and 40 percent of the total,” says Experian.

Use Credit Cards

Since cash payments don’t register on credit reports, it is important to have credit cards that you use and pay regularly. By switching buying all your essential purchases with a credit card and then paying the balance each month, or at least keeping your card balance below 30% of your credit limit. It also important not to use more than one or two cards since outstanding balances on several cards can also have a negative impact on your credit rating.

Using credit cards responsibly will result in a rapid increase of your credit rating, however if you’ve lost credit card privileges due to foreclosure, you can get a secured credit card with a local or national bank, where you pay the balance each month to begin to repair your credit history.

“Reducing your balances on credit cards and other revolving credit accounts is likely the better option to improve your credit utilization rate, and, subsequently, your credit scores. Consistently making on-time payments against your debt will also help you build a positive credit history, which can have additional benefits for your credit history and, by extension, your credit scores, too,” says Experian.

Avoid More Debt

When rebuilding your credit history, it is important not to take on additional debt. Avoid auto and personal loans, as well as new credit cards in order to ensure you don’t clutter your credit report with more debt. Additional debt will indicate to credit agencies that you’re unable to leave within your means, which will have negative repercussion on your report.

“Applications for credit show up as inquiries on your credit report, indicating to lenders that you may be taking on new debt. It may be to your advantage to use the credit you already have to prove your ongoing ability to manage credit responsibly,” says Experian.

Buying a Home After Foreclosure

The ability to buy a home after foreclosure depends on the type of mortgage you apply for. Loans backed by Fannie Mae and Freddie Mac cannot be approved until seven years after a foreclosure.

VA loans, on the other hand, only require only a two-year waiting period after a foreclosure. FHA loans allow qualified borrowers to buy a home a year after foreclosure if the borrower can show the foreclosure was due to a temporary setback, such as job loss or illness.

Credit unions and hard money lenders that offer mortgage loans also tend to be more lenient towards foreclosed upon homeowners.

According to Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage, “If you’ve had this event, you’re most likely to get a loan if you understand why it happens, and you’ve taken steps to make sure it doesn’t happen again. Whatever you did wrong, you need to set yourself up so that it doesn’t happen again.”

Start Saving Money

While your credit score is recovering, it is wise to begin saving money for a new home purchase in the future since most banks will look favorably upon borrowers who have upwards of 20% saved for a down payment.

According to Gregory Erich Phillips, a mortgage loan officer and real estate expert, “Lenders and mortgage insurers want to verify that you have the savings to help prevent a future financial problem. Saving for a down payment is one of the ways you can show that you are financially responsible. FHA loans do offer another option with a smaller down payment (3.5%).”

Maintain Low Debt-to-Income Ratio

It is important to maintain a 35% or lower debt-to-income ratio, which includes your expected new mortgage payment. Keeping your debt low after foreclosure goes a long way when it comes to proving fiscal responsibility to a bank or mortgage lender.

To calculate your debt-to-income ratio, “You need to determine your monthly gross income first. That’s your income before taxes, not your take-home pay. Then determine what your monthly debt payments are. Be sure to include credit cards, auto loan, mortgage, etc. Then simply divide your total debt payments by your monthly income gross,” according to Credit.org, a non-profit agency.

It is also important to exercise patience while your credit score improves. “Know that time is your friend, as the farther you move away from the financial distress, the less negative impact it ha. Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file,” says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling.

Scroll to top