Rebuilding Your Credit
A foreclosure is often believed to be the one worst thing that could ever happen to your credit score. While there is little doubt that it will damage your credit score considerably, the good news is that YOU CAN Rebuild Your Credit Score . In fact, your credit score can start to rebound in as little as two years, says FICO.
The main credit score website, MyFICO, says that the key to rebuilding credit quickly is to isolate the foreclosure. In other words, if you are able to maintain paying all of your other bills on time, then you can minimize the damage done. This will make it appear to be a single negative item. However, if you miss payments on a lot of different items at the same time, the damage will be far greater and will certainly take longer to recover.
With Foreclosure Less is More
It may sound a little strange, but the higher your credit score is to start with, the longer it will take to recover from a foreclosure. When a foreclosure occurs to someone with a very good credit score, it will drop further once it happens. A lower credit score to start with will not drop as much – enabling that individual to recover to that same level faster.
One way to minimize the damage is to take some steps beforehand. Two options that the Federal Reserve Bank says will help rebuild your credit as quickly as possible is to consider either a “deed-in-lieu” or a “short sale”. Either choice will most likely help you to reduce the damage to your credit score. The longer that your mortgage payments go unpaid the more it affects your credit score, so taking some action, if possible, as early as you can, will mean that less time will be needed to recover.
What is a Deed-in-Lieu?
According to Wikipedia:
A deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings. The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts his/her credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.What is a Short Sale?
Once again Wikipedia says:
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens’ full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. While credit is also typically damaged much less than from a foreclosure, both often result in a negative credit report against the property owner.After Foreclosure
Once you have gone through the foreclosure process, you will want to start rebuilding your credit as quickly as possible. Some forms of credit will not be hard to obtain, but the interest rates on those items is apt to be high.
Two tools that some lenders make available for the purpose of rebuilding your credit is a secured credit card or a loan that is secured by a CD. Either one is purchased for the amount of credit that is going to be given. There will often be a considerable amount of fees, which will reduce the actual credit you can use.
With any type of credit building tool, it is essential that payments repeatedly be made on time. This is the largest consideration used by FICO to build your credit score. Another very important factor is to make sure that your lender reports to the three major credit unions.
As is true of most products, you can do better by shopping around. There is a lot of variation between credit-building tools and lenders, so be sure to get information from several before choosing a tool. Interest rates may also be very high on some secure cards, but others may be quite reasonable.
You also want to be very careful about choosing to work with any agency or company offering to provide debt counseling or debt reduction services. Many of these agencies are scams, so be sure to read up on them to know what to look for if you are considering using their services.
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