If you have a foreclosure or bankruptcy because you screwed up, do not despair. If you bought at the wrong time, took on too much debt and fear you will never be able to buy another piece of real estate, don’t worry so much. Last time around, lenders forgave past transgressions.
As it is now, most loan programs require that bankruptcies and foreclosures be 2-3 years old to qualify for the good rates. But more credit rehab is likely in order to get your next loan, even for borrowers that voluntarily defaulted.
Way too many people take the easy way out and declared foreclosure when their house is upside-down. It is called a strategic foreclosure; and many people, some young and inexperienced as well as others who aren’t, back out of their mortgage because the house is worth less that the note. They can still afford the mortgage but elect not to pay it, even blaming the bank for lending them the money in the first place.
I must be in the twilight zone because these are not the values that I grew up with. If you promise to pay-called a promissory note-you pay back your borrowed money, even if you have to eat beans for breakfast.
When they want to buy a house in the future, they will whine because it will be harder to get a loan….at first. Ultimately, in a normal loan market they can find a lender who will give them a loan. Lenders will forgive everybody; it happened before.
The last foreclosure wave in California where I was doing loans, was in the mid 1990’s. Lenders started easing up in the early 2000’s on credit histories that had a foreclosure or a bankruptcy on them. That’s because most of my customers did not escape the hard times without having some bruised credit thanks to medical collections, mortgage late pays, judgments, and foreclosures or bankruptcies. There was nobody else left to lend to, so lenders gradually opened the gates. First the foreclosure had to be five years old to get the good rates, then three years and soon it was two. So, it gets easier to qualify for a loan as good times return.
Valid hardship cases can get a loan because lenders will take on more risk in better times, even to dilettantes who deserve no better.
I have eight tips for people whose credit got banged up during this last downturn:
- Establish new credit accounts as soon as the foreclosure is completed or your once bankruptcy is discharged. Start off with a gas card or a department store card because often they will take more risk.
- Lenders typically want to see 3 new lines of credit established for at least 2 years.
- Be late no more. Every late you have during this credit rehab period will do double damage.
- If you are renting, try getting your landlord to report your successful payment history to a credit bureau.
- Pay down your credit cards and use them lightly. Keep them open with low balances; do not close them.
- Up those credit card limits. The higher your credit utilization potential, the better. In other words, have the capacity to charge a lot on your cards but don’t. This shows any future lender you have credit restraint
- If you did a bankruptcy, make sure those debts you included in your bankruptcy show as “discharged in bankruptcy” and not “still owed” or “open charge offs”
- To get your free credit report, go to AnnualCreditReport.com. To get your credit score you will have to pay extra.
So if you got in over your head, took on too much debt and now your credit looks like a warzone — my sympathies are with you. If you just walked away from a house payment you could afford simply because it was a “business decision,” you do not get my respect. In any case going into foreclosure is no fun. I know because it happened to me.
That’s right, my first real estate investment ended in foreclosure. It was gut wrenching, financially devastating and I never wanted to touch another piece of real estate again. But I did go on to prosper, and that is a story I will share with you guys next time.