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I’ve Been Foreclosed On. Now What?

The current saga of foreclosures is swiftly turning into a nationwide outbreak. By the end of next year, an estimated 5.5 million homes are expected to foreclose – leaving many Americans wondering how they’ll ever be able to rebuild their American Dream.  “This is a very humbling thing, when people are foreclosed on,” says financial expert Ilyce R. Glick of www.thinkglick.com.  “You failed at something very major…It’s going to require a healing process.”
Here’s our 7-step program.
1.      FACE THE MUSIC.  While a foreclosure is not as dire as full-on bankruptcy, it still has long-term repercussions. Banks will likely turn you down for lines of credit for a new home, a new car and any other private loans for years to come.  “The next five years of your life could be problematic,” says Glick. Realize that to attain the best interest rate on a 30-year fixed mortgage, banks desire applicants with scores of 740 or better and enough money in the bank to afford a 20% down payment.   Meanwhile, conforming loans from Fannie Mae (FNM) and Freddie Mac (FRE) require borrowers to have scores of at least 620 to qualify and 10% down. 
2.      PULL YOUR CREDIT REPORT. While it will take years to get your financial health back in order, there’s no time like the present to start on the repairs. Upon foreclosing, download your credit report from one of the major credit reporting agencies to get a sense of the damage.  Where exactly do you stand? What other accounts are in trouble?  You’re allowed to receive a free annual credit report from each of the three major credit unions each year, including Experian, TransUnion and Equifax (EFX). You can also log onto www.annualcreditreport.com  to access your files for free. 
3.      OPTIMIZE YOUR CREDIT RATING. It’s not enough to improve your credit report and score back to where it was prior to the foreclosure.  “[Lending] standards are changing all the time, and right now standards are really high,” says Alexis McGee, co-founder and president of www.foreclosures.com.  Visit FICO.com to purchase your credit score.  It may cost $8 or $9 to do so, but it’s essential to have a sense of how hard you need to work to rebuild your credit reputation.  The first step is to continue to pay your outstanding bills on time.  Pay down any and all outstanding credit card debt, beginning with the highest interest rate cards, and reduce your credit utilization ratio to 30% or less (that’s equal to how much you’re borrowing versus how much credit you have extended to you). At the same time, you need to replenish your savings, your 401(k) and/or any of your retirement savings.
4.      DOWNSIZE YOUR LIFE and CASH IN. Post-foreclosure, less is always more.  To help shore up your savings and cash reserves, consider getting rid of any and all excess material possessions that you either don’t have room for or don’t need. Online sites like eBay (EBAY) and Craigslist are a great way to advertise your sales. Keep that money in an interest bearing checking account that can serve as a down payment for a future home. 
5.      LEAN ON FAMILY/FRIENDS. “Most of the time [foreclosed families] take on some form of shared living with family members,” says McGee. This can be a life saver, especially if you don’t have enough money to afford a lease. Work out a plan to help with the household’s finances, like contributing a portion of the rent or paying for groceries.
6.      CONSIDER A LEASE-TO-OWN.  Since it’s tough to qualify for a new mortgage, some households may decide to rent a home with the agreement to buy it down the road.  It’s called a “lease option,” and usually requires tenants pay rent plus an added amount each month that goes towards the eventual down payment on the home.  This is best if you have enough cash in the bank to afford the monthly payments. Also if the term on your lease option is less than five years it may not be enough time. Banks may want to wait longer to consider you for a mortgage again.
7.      RE-EDUCATE YOURSELF. Relearn how to manage money again. Take advantage of free financial classes at a local bank, school or community center.  Visit the Consumer Credit Counseling Service at www.cccsinc.org to locate a “money smart center” near you. 
 
Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8 p.m.

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