How to Recover from Foreclosure

How to Recover from Foreclosure

In reality, foreclosures are not uncommon – but they can be extremely stressful.

No one wants to lose their home but sometimes circumstances beyond your control place you in this delicate situation.

Luckily, foreclosures are not the end all and be all of your home-owning days. With some fortitude, you can turn the situation around and own a home again in the future.

Not sure how? Keep reading to learn more about what foreclosure is and how you can recover from it:

What is Foreclosure?

When you miss a specific amount of mortgage payments, foreclosure is the legal process the lender uses to recover the amount owed. They do so by taking ownership of the mortgaged property and selling it.

The process begins when you miss one mortgage payment. The lender will send you a missed payment notice.

After two missed payments, a demand letter is sent. At this point you may not be in deep trouble yet – the lender may be willing to make arrangements in order for you to catch up on the missed payments.

After 90 days of missed payments, the lender sends a notice of default and the loan is handed over to the lender’s foreclosure department. Following this notice, you usually have another 90 days to settle the payments and reinstate the loan.

Once this period of time is over, the foreclosure process begins.

The Consequences of Foreclosure

Foreclosures are not without consequences. Not only will you lose your home, but you will experience a significant hit to your credit score.

The impact a foreclosure will have on your credit score depends on your lender, your circumstances, the value of your home and outstanding balance still owing on the mortgage.

In some cases, lenders do not report mortgages to credit bureaus. In these cases, your credit score will not be affected by the foreclosure. 

However, if your lender obtains a judgment against you to recover their lost money, the judgment will reflect upon your credit score. Judgments are typically made if the proceeds of the sale of your house do not cover the outstanding balance of the mortgage.

A foreclosure can affect your credit score for anywhere between 7 and 10 years. Until then, it may be difficult, if not impossible, to secure a loan from a traditional lender.

In order to secure a loan, you may have to provide a lot of paperwork to prove that you can make your payments on time.

If you are approved for another loan, you will likely face higher interest rates because of the added risk involved for the lender.

How to Recover from a Foreclosure

Worried woman sitting in front of laptop looking at a piece of paper

Dealing with a foreclosure is difficult and stressful but it doesn’t mean that you will forever be financially stunted.

Here are some tips for recovering from a foreclosure:

1. Change Your Spending Habits

In order to move forward from a foreclosure, you need to change your spending habits. Focus on paying down your other debts, creating a healthy savings account and avoiding unnecessary purchases.

If you plan on buying another house in the future, you need to start saving for a down payment as well as closing costs. The more you can save, the more likely you will be approved for another mortgage.

Put aside any extra income, create a budget and set up an automatic deposit into your savings account.

2. Use Credit Cards Wisely

If your credit was affected by the foreclosure, you’ll want to start building up your credit score as soon as possible.

Credit cards offer an opportunity to start establishing good credit again, but you have to use them wisely.

Keep an eye on annual interest rates and additional fees when choosing a credit card. Also, use the card for small purchases that you can pay off in full each month.

3. Pay Your Bills on Time

Credit cards aren’t the only way credit bureaus gauge your credit score. They also look at bill payments and whether or not these are made on time.

Try to pay your bills a week before they are due to ensure that you don’t get behind on their payments. 

The more you pay your regular bills on time, the more your credit score will steadily increase over time.

4. Build an Emergency Fund

While you may consider an emergency fund the same thing as a savings account, look at having an emergency fund as a buffer should your circumstances begin to worsen.

Instead of facing another foreclosure, or even bankruptcy, you can use your emergency fund to cover important and necessary expenses.

5. Wait At Least Two Year Before Buying Another Home

Losing your home is devastating and you may be anxious to purchase another. However, after a foreclosure, it’s best to wait at least two years.

Most lenders will likely refuse to approve another mortgage application until your foreclosure has been discharged for at a minimum of two years.

Also, you will need to show steady employment and stable income before you will be considered.

If you can’t wait that long, your options are typically limited to a private lender or an uninsured lender that will require as much as a 10-25% down payment.

6. Consider a Shorter Mortgage

Most mortgage advisors will recommend that you choose a 1-2 year term on your mortgage in order to avoid paying a high rate as you recover from your credit problems.

A good broker will coach you on rebuilding your credit during this time and then explore a refinancing option with a lower interest rate.

Foreclosures Are Not the End

In fact, foreclosures are an opportunity to reestablish your credit and strengthen your financial habits.

Let our experts at Caplink help guide you through the foreclosure process. With our knowledge and expertise, we can get you back on your feet and find a lending solution to fit your unique situation and needs.

Contact us today for more information!