April 16, 2014 – By Aaron Crowe
Legally, a foreclosure can stay on your credit report for seven years. It can lower a credit score and make it more difficult to apply for loans and even find rental housing. But life after foreclosure doesn’t have to be all bad news.
Homeowners who fell behind on their mortgage payments and defaulted on a loan should not only try to improve their credit before facing a foreclosure eviction, but can do a lot in improving their financial life after foreclosure.
“You kind of want to punish the borrower so it doesn’t happen again. It’s a short amount of time,” says Lauren Rode, an attorney specializing in foreclosures at Consumer Action Law Group in Los Angeles, of the seven-year rule.
The good news is a foreclosure doesn’t have to ruin your credit forever, says Stefanie O’Connell, a New York City actress who blogs about being frugal. “While the foreclosure remains on your credit report for seven years, the impact on your score will lessen over time.
“If the foreclosure remains an isolated incident and you are able to prove your creditworthiness thereafter, your credit score can begin to rebound in as little as two years, reflecting the positive change.”
A recent report by RealtyTrac shows that there were 117,485 foreclosure filings on U.S. homes in March, down 23% from a year ago. The drop is good news in an environment where foreclosures don’t carry the stigma they once did.
Here are some things to do to improve your financial life after foreclosure:
Pay bills on time
The top goal to get your financial life after foreclosure back in order is to start building up credit again long before the seven years are up, Rode says.
This should include paying bills on time and in full. Another move is to write a letter to lenders explaining the circumstances of the foreclosure. Losing a job in the recession, for example, may be looked as a reasonable explanation for being foreclosed on.
Don’t buy credit help
One thing to be wary of immediately after a foreclosure is anyone promising to keep your foreclosure off of a credit report or from hurting credit, says Scott Withiam, housing manager at American Consumer Credit Counseling. Don’t buy such services.
Visit a counselor
Since it can take two to three years to recover credit, Withiam suggests that the first step in life after foreclosure is seeing a housing counselor. Divide a plan into immediate (survival), mid-term (back on your feet), and long-term (now we can think about our future again), he says.
An immediate plan should be for new housing and a budget that matches a possible change in location, income, or transportation. “Another immediate plan is the preparation for the impact of foreclosure on credit score and its relation to the loss of credit availability and use,” Withiam says. “What can I do, for instance, if my new landlord requires a credit score?”
A mid-range or adjustment period plan will also include credit restoration. A long-range plan might entail owning a home again or restoring retirement savings which were lost in an attempt to save the house before it was foreclosed, he said. Again, this would involve revisiting the budget.
Prepare for higher rental deposits
Today, most banks will not finance a new home for someone who has gone through a foreclosure, and a landlord will be weary too, says Shawn Council, an attorney in Bloomfield, Conn.
“It is a good time to reassess your finances and downsize your living arrangements,” Council says. “Renting is still an option and proposing a higher security deposit may put a potential landlord at ease.”
Once you move into a rental property, be sure to pay your rent on time and keep payment receipts to make life after foreclosure easier. “If you have cash, you maybe able to purchase an affordable home or foreclosure for a fraction of what you own foreclosed home cost,” she says. “There is hope, after foreclosure, for homeownership again.”
Check foreclosed home’s value
One thing that many people don’t realize in preparing for life after foreclosure is that they’re entitled to any excess funds if their foreclosed home is sold for more than they owed on it, says attorney Rode.
This can happen as home sale prices start increasing again. For example, if the balance on a home loan is $250,000 and the bank sold the home for $300,000, the homeowner can get the $50,000 difference. A bank trustee is required to give the money to the court that handled the foreclosure proceeding, and the homeowner can fill out a form to get the excess funds, Rode says.
“The lender is only entitled to exactly what the loan was for,” she says.
Many foreclosed homeowners don’t know about this rule, or don’t think to check on their home’s sale price after they’ve been evicted, Rode says. It can be a quick way to get back on your financial feet and return to a normal life after foreclosure.
