How to Overcome that Foreclosure: Do Not Despair If You Screwed Up!

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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:

  1. 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.
  2.  Lenders typically want to see 3 new lines of credit established for at least 2 years.
  3. Be late no more. Every late you have during this credit rehab period will do double damage.
  4. If you are renting, try getting your landlord to report your successful payment history to a credit bureau.
  5. Pay down your credit cards and use them lightly. Keep them open with low balances; do not close them.
  6. 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
  7. 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”
  8. 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.

About Author

Steve is the author of three books, is an invited expert commentator for CNN/Money, CBS Radio, Fox TV and numerous other newspapers and media outlets, has been a distinguished speaker at the Harvard Business School, Harvard Law School and their Graduate School of Design, and teaches courses in investing and real estate finance at colleges across Southern California. He is also an active real estate investor and owns 27 investment houses in Southern California and around the country.

7 Comments

  1. Steve,
    I can’t count how often I’ve seen people draining their savings to keep up with their mortgage so that they can keep up their good credit standing, fear of not being able to buy a house for 10 years!

    For some people this makes sense but for many I feel bad simply because they’re putting good money into bad (for most cases). Thanks for the tips you shared for this could be a starting ground for many new future homeowners.

    Thanks for the post.

    • Mh —stay tuned for my personal horror story; it is already written and will be posted next Thurs.There is so much devastion these last ten years.
      Ian. ITs true that lenders will open their doors to accept the huge population of all who have marked up credit

      • will do. and yeah – devastation is precisely the word for it. I grew up in Scottsdale, AZ, and I remember what a plush, booming, high-priced world that used to be…. now I go home to visit and see “bank-owned” properties and decaying saguaros all over the place.

  2. Steve:

    You state the following:

    “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.”

    Respectfully, your use of the word(s) “screwed-up”in the title to this”piece” is misplaced, and in fact most likely not palatable for public discourse

    That said, maybe you can enlighten us as to whom (EXACTLY WHAT ENTITY) a borrower is to pay off their promissory note. Have you heard of the concept of mortgage securitizaqtion? OR STUDY DERIVATIVE INVSTMENTS? Did you know the originating “bank” now owns NOTHING? Did you know that s the originating lender quickly divested itself of all ownership of promissory note (I.E. they HAVE ALREADY BEEN FULLY PAID FOR THE OBLIGATION), but retained the servicing rights?creating the sppearance to the borrower (and the court) that it still is the owner. dID YOU KNOW THAT THE MORTGAGE SERVICERS ATTORNEY CREATES AND FILES ASSIGNMENTS OF MORTGAGE TO FRAUDULENTLY CREATE THE APPEARANCE OF A COMPLETE CHAIN OF TITLE TO THE SECURITY INTEREST FOR THE NOTE (MORTGAGE)? DID YOU KNOW THAT MOST MORTGAGE NOTES WERE INTENTIONALLY ELIMINATED? LEAVING THEM UNENFORCEABLE UNDER THE UNIFORM COMMERCIAL CODE??

    no Steve, to use your terminology,the only “screw-up” was allowing the financial institution lobbyists to “persuade” lawmakers that the repeal of Glass Stegal was a great thing

    History will judge quite harshly those who cast a blind or jaundiced eye upon the viewpointsI express here,

    2011 will be a YEAR OF MAJOR ENLIGHTENMENT FOR THE SEGMENT OF THE PUBLIC (YOU INCLUDED STEVE) WHO EITHER ARE COMPLETELY MISINFORMED, OR MORE INSIDIOUSLY SPOUT PROPAGANDA

    Steve those like you only focus on the fact that the borrower is not paying. without ever giving the slightest consideration about the fact that (a)the obligation has already been paid off,(pool insurance,or other form of credit enhancement),or (b) what entity is actually owed any money through proferring evidence they actually have the legal right to enforcethe terms of the note and

    I mean if you took a mortgage out from party A, YOU OWE MONEY TO SOMOONE AND JUST BECAUSE PARTY B IS FORECLOSING THATS PERFECTLY FINE BECAUSE YOU OWE MONEY TO “SOMEONE”. Because you owemoney tosomone,(in your view) its absurd forthe borrower to askthe pesky question///whereisyour proofyou have the righttotake the roof over my head and tossmeintothe street..isnt thagt right Steve?

    Maybe you can teach us all how thats perfectly fine Steve

    I await your response

    crickets

    RUSS

    • Crickets to you too Russ.
      For me, it is simple and perhaps I am simple minded in this regard. I borrow money from a bank, lender or whatever corp entity to benefit me in the purchase of real estate. I enjoy the use of the residence if I live there, I get teh taax break the IRS code generuosly gives me, I get cash flow from the rents if it is investment property and I get profits when I sell it if I bought it at the right time of the market.
      Selling now is not the right time. I cannot blame the lender for avarice, greed, bad paperwork, non-compliance for lending me the money . That is not their fault that I chose the wrong time to buy property. End of story.
      I guarantee you if the market was going up and you were making money….you would not be complaining.
      The reason I wrote the article was to tell people to take their lumps of they screwed up. I did, it was healing and I didnot blame somebody for their sloppy paperwork or inept foreclosure procedures The quicker we are acconutable for our past actions, the sooner we can become successful property investors, own a bunch of properties and enjoy passive cash flow. And what is wrong w that?
      Im sure you know this, russ, you are a smart guy

  3. This is definitely a judgemental crowd!
    I strategically defaulted on one of my properties that was 50% underwater in Las Vegas. It was a business decision, the kind the banks make every day (So I guess Im one of those people you detest).

    I actually think that if more people strategically defaulted, versus holding on for an extra year then defaulting, it will help this crisis bottom out quicker. I was in the minority that I felt completely comfortable making the decision when I lost my job, to save up and take a chance on me and not hte banks.

    Many people default for many reasons. You can hold your nose up to the ceiling all you want to make yourself feel better about YOUR own decisions (not you in particular, but everyone who thinks defaulters are deadbeats—i want to see what happens when they lose their jobs and it takes them 12 months to get another one).

    With that said, I think you article is good for people who did not realize they did not have to wait as long. I actually called FHA offices to find out what the waiting period was (1-3yrs depending on foreclosure or shortsale) and MY business decisions was to let this bad investment go, wait 3 years and save up more capital. Let me tell you, by 2012, Im going to be a monster with A) The knowledge I now have B) Forced waiting period to build up savings.

    All in all, I think I ll come out better than most, because i would have been through the hard times and came out stronger.
    Lisa

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