In March of this year SoundBiteBlog.com published an article titled There Is Hope After Foreclosure. On September 4th we received an email that reminded us once again just how small and personal the planet is when you maintain a blog.

DM from California sent an email asking that I expand on the original article. Her view is that now, more than ever, consumers will be  searching for information concerning what to do after a foreclosure. Her comments got me thinking and I tend to agree with her.

“Dear Mr. Flanders,

…I came across your article regarding life after foreclosure while doing a search of the same title…

…I am a mortgage consultant in California and have been for almost 16 years…

…I am so concerned about the state of and future of our industry. What’s to happen not only to us, but also our clients?…

…I have spent much time reading and researching about the current foreclosure activity nationwide…

…Yours was the first article I was able to find about life after foreslosure. I was wondering if you would have any ammendments or thoughts to add to the article given the date you originally wrote the article and the present state of the industry?…”

First - Let’s Face The Facts

Some facts of life are unpleasant to face, but they must be faced nonetheless. The facts about recovering from a foreclosure fall into the unpleasant category. But this is no time to delude yourself with thoughts like “everything will work itself out”. After a foreclosure you need to “work things out”. You must be proactive; you must be consistent and determined. Your efforts will pay off in short order.

You will need a down payment if you want to purchase a home within 24 months of the foreclosure.

If you want to purchase another home in less than 24 months, expect to bring cash to the transaction. That’s the bad news. The good news is, if you are determined to purchase as quickly as possible and you have saved up a down payment, you can buy a home in as short a time as 12 months plus 1 day. These mortgage loan programs will require between 10% and 25% down payment. The terms of these loans (interest rates, pre-payment penalties, etc) will not be attractive. But, these programs will allow you to get back into a home quickly. This new loan will show up on your credit report as a mortgage and it will help improve your overall credit picture. But it will do so at a cost.

You will need to have a ‘clean’ credit history after the foreclosure.

I had an underwriter make the following comments while reviewing a file: “Mark, your clients missed four house payments before they were removed from the property. Yet they were also late on their car payments, credit cards and they have a collection from the power company. What did they do with the $7000? They certainly didn’t use it to pay bills”.

This client had missed four $1800 payments. The underwriter was willing to consider the file but could not get past the fact that the money for housing costs had disappeared with no apparent attempt on the borrowers part to use it for other bills. Do everything you can to keep current on your other liabilities.

You will need to show job stability.

Bouncing around between different jobs gives the appearance of instability. Longevity on a job shows discipline. Your new lender will be looking for signs of discipline.

You will need “Reserves”

Reserves in underwriter-speak, refer to cash or other liquid assets (like retirement accounts, IRAs, mutual funds). In most cases, you will need a minimum of 2 months of reserves. (You will need to prove that you can pay your bills even if you have no job income). This creates a safety net for you and indicates to the new lender that you can weather a financial crisis if you need to. Some loan programs require up to 6 months of reserves.

If you plan to use retirement accounts as reserves, be aware that you may only be able to count 75% of the account’s face value. This is because penalties often apply to the early withdrawal of funds from retirement accounts. Have your loan officer check these guidelines carefully.

What You Can Do Right Now

If you are one of the many American homeowners in this position, there are things you can do right now to set the wheels in motion for the future purchase of a home. A foreclosure is not the end of your dreams of owning a piece of real estate. A foreclosure is a stumbling block. It is a very large stumbling block, but it can be overcome with some consistent effort and a willingness to re-prove yourself to potential lenders.

Yesterday while preparing to write this article, I searched for lenders in the US who have loan programs for borrowers with a foreclosure in their recent past. I found 72 such loan programs in about half an hour! A foreclosure will not stop you if you are determined to own a home again. It will slow you down.

The good news is obvious. It appears that many lenders are already prepared to make new mortgage loans to people who have had a foreclosure in the recent past. My guess is that within the next 2 years we will see more and more mortgage lenders create programs for this group of borrowers. The loan parameters will be strict but for homebuyers determined to reestablish themselves as homeowners, lenders will be waiting to fill the breach with a new mortgage. 

Pay your rent on time, all the time

Your rental payment history will be critical when you apply for the next mortgage. It will be looked at carefully as an indicator of how you pay for your housing needs. Keep in mind some landlords keep very good records and some do not. You will need a complete history of your payment pattern so make sure your landlord will be able to provide it when you need it.

Pay off any collections that may have accumulated

A foreclosure is not usually the only item of derogatory credit that shows up on a credit report. More often there will be other accounts that suffered late payments, bills that went to a collection company and accounts that were closed for non-payment.

Get aggressive about tracking down any creditor who has reported a collection on your credit report and get them paid. Expect to be treated poorly at first. Remember that the majority of the people a collection agency talks to are trying to avoid paying for their collections. The collection agent will probably assume you are the same. Once the collection company sees you are trying to resolve your debt with them, you should find them more helpful and polite. Just don’t expect it at first.

Try not to take ill treatment personally. Remember what you are trying to accomplish. Take pride in the fact that you are attempting what many people wont. You are reestablishing good credit.

Pay any judgments you have acquired

Treat any judgments as you would collections. Contact the creditor and see if you can work out some way to “satisfy” the judgment. Negotiation of the balance is sometimes possible. Payment arrangements are also possible.

You want a letter stating that your judgment has been satisfied. Even if this document in not recorded at the courthouse, it will serve as proof that you paid the debt. The underwriter will want a copy of this proof. If you can get your credit report altered to show your judgment has been satisfied, you will be once step closer to your goal of homeownership.

Start a savings plan

At a minimum, you will want to have all the funds necessary to pay for your closing costs and pre-paid items (property taxes, homeowners insurance etc). If you can save money for down payment, all the better.

You should set a minimum target of closing costs + required reserves (see above). This is one of the reason’s it’s prudent to establish a relationship with a loan officer early in the process. The loan officer will be able to tell you what amounts to expect for both of these items. 

Contribute to your retirement accounts

Regular deposits to a retirement account indicate someone is planning for their future. Deposits over time indicate self-discipline. The ability to make regular deposits indicates someone who is earning more money than what they require for basic living expenses. All of these indicators help strengthen your financial picture as someone who is a good credit risk borrower.

In addition, as I mentioned above, retirement account balances can be used to prove you have sufficient reserves to handle potential financial problems while continuing to make a new house payment.

Contribute as much as you can to your retirement accounts during the time you are rebuilding after a foreclosure. Don’t forget you can reduce your retirement contribution later if you need to.

Establish new credit

There is a fine line to tread with regard to new credit. On the one hand, you need to show you have established (and paid for) new credit, on the other hand, you don’t want to give the impression you are working your way right back into a debt problem.

Here is one idea of many for establishing new credit. This technique costs very little, does not require a credit review (in most cases) and can be paid in full whenever you decide the time is right.

It is a very good idea to gain some new creditors as soon as you can after a foreclosure. But you must be ruthless about getting this new credit paid on time or you will create a new problem. If you can manage your new debt well, it will improve the overall picture of your creditworthiness when the time comes to apply for your next home loan. One well-know guideline to follow is the 29% guideline. Don’t let any credit card balance exceed 29% of the available credit line. If you exceed the guideline, your credit score will drop.

Monitor your credit report

It can be emotionally difficult to look at your credit report after a foreclosure. If you only remember one thing from this article, remember this. Your credit report after a foreclosure is not a reflection of your character. This credit report is simply your starting point for the future. Try to view it like a roadmap. You cannot get from Seattle to Boston without a map that shows both places. You begin in one town, you follow the map and you will end up in the other town. But you must look at both places to get where you want to go.

As you work your way towards buying your next home, make sure you get updated copies of your credit report. It is very satisfying to see the improvements to your credit that will occur. This will also give you early warning if something pops up on your credit report as time passes. An early warning will allow you to correct discrepancies before you apply for your next home loan.

Find a loan officer with whom you feel comfortable as early as possible

Although it can be hard to share your credit difficuties with a loan officer, it will help you tremendously to have access to a loan officer while you are rebuilding. Take some time to interview a few likely prospects before you actually need a loan. Look for someone with experience handling credit challenged files. Many loan officers specialize in this area. Ask if they are familiar with the government loan programs like FHA. Watch for someone with empathy and a non-judgmental approach. It is not necessary to discuss the details of your situation with a loan officer on the first visit. Simply explain that you are currently working at correcting past credit problems and explain that you know it will take some time. Remember that you are interviewing the loan officer, not the other way around.

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