2008 was a long time ago. Right now, the housing market ought to be better.
That might be the case for the United States as a whole, but not for many people. According to RealtyTrac, despite the fact that the 2016 U.S. foreclosure rate was at a 10-year low, there were still roughly one million foreclosed houses.
We include ourselves among those unlucky homeowners, my husband and I. We recently completed a deed in lieu of foreclosure with our mortgage company, even though we aren’t technically in a full foreclosure.
This means that in exchange for being freed from the mortgage, we voluntarily give our house back to the bank. We tried for more than two years to sell the house, but were unsuccessful, so this was our best alternative. Eventually, our house required a $35,000 repair that we were unable to pay for and we were unable to rent it out for a price that would at least cover the expense. We finally were unable to afford to maintain the house due to our inability to pay our own rent, the mortgage, and maintenance.
Even if it’s bad right now, nothing terrible will happen. You can even take advantage of this chance if you’re dealing with a foreclosure or a deed in lieu of foreclosure to emerge even stronger than before.
What Your Credit Score Will Look Like After a Foreclosure or Deed in Lieu of Foreclosure
Let’s start with the negative news. Your credit score will significantly decline.
Several factors determine how far it will fall, including:
- Prior to the event, your credit score
- The mortgage settlement type (foreclosure, deed in lieu of foreclosure or short sale)
Depending on their starting credit score, a person who files for foreclosure can anticipate a decline of 85 to 160 points or more in their credit score. Your credit score may decrease by 50 to 125 points or more for a deed in lieu of foreclosure, again depending on your initial credit score.
Unfortunately, your credit score will decline more quickly the higher it was before the event. You could just be grateful to have a lesser credit score at this particular moment.
My husband’s credit score decreased by 111 points, from 798 to 687. Fortunately, I escaped this tragedy because the mortgage was in his name.
Even if it aches right now, it will pass. Although this negative incident will remain on your credit report for seven years, your credit score might almost instantly begin to improve. Although seven years is a long period, you can make the most of it.
How to Survive a Foreclosure or Deed in Lieu of Foreclosure Stronger
To recover from a foreclosure or deed in lieu of foreclosure, you’ll need a fundamental plan. Here is a method that is step-by-step:
1. Ask for copies of your credit report.
Request copies of your official credit reports from each bureau once you’re certain that the foreclosure or deed in lieu of foreclosure has been reported (look for a significant score decline while monitoring your Credit Sesame account). Visit www.annualcreditreport.com once a year to perform this for free. Verify the dates, that no late payments (if you made all of your installments on time) were recorded, and that the type of mortgage settlement was reported properly. If not, you have the option of disputing the data with the credit bureau.
2. Examine your Credit Sesame account to learn further ways to raise your credit score.
You’ll notice a My Credit Analysis section next to your score when you log into your Credit Sesame account, along with grades for each credit aspect. You can strive to improve any area in which you scored lower than an A. You can take the following actions:
- Payment history – Set up automatic payments on each of your accounts to make sure you never miss a payment.
- Credit utilization – If at all possible, refrain from adding to the balances on your current credit cards. Put up the most effort possible to pay off your debt (especially credit card debt). Additionally, you can ask for extensions on your current credit lines, which can lower your credit usage and raise your score (keep in mind that a credit limit increase request results in a hard inquiry, which can cause a temporary dip in your score).
- Credit age – If at all possible, refrain from opening any new accounts. If at all feasible, keep your oldest accounts open. If you aren’t utilizing a younger account, think about shutting it.
- Avoid applying for credit until you truly need it to avoid credit inquiries. Your score could be reduced by a few points as a result of each query. While the inquiry remains on record in your file for two years, you will recover from the blow within a year. Try starting with quotations from businesses that offer gentle credit pulls if you need to comparison shop initially. Additionally, if you shop for a mortgage, student loan, or car during a two-week period, all queries from that category of lender will be counted as a single inquiry for the purposes of calculating your credit score. Depending on the scoring algorithm used to create your credit score, the rate-shopping window can range from 14 to 45 days.
3. Save money to buy a new house.
A new government-backed mortgage won’t be available to you until four years have passed since the Deed in Lieu of Foreclosure’s completion date (two years if you can show extenuating circumstances). Your financial interests may be best served by waiting until the event comes off your credit report, even if you qualify that quickly (seven years). Spend this time saving money so you have enough to put down 20% on your next house. In this approach, you’ll have a lot of equity in your home right away, you might be able to get the best rate, your monthly payments will be reduced, and you won’t have to pay expensive PMI premiums every month.
4. Create a plan for your upcoming home purchase.
I don’t know about you, but when we purchased our home, we made a lot of mistakes that ultimately came back to haunt us and caused us to execute our own deed in lieu of foreclosure.
For instance, we didn’t fully inspect it to find the significant repair difficulties. Additionally, we didn’t make the 20% down payment that could have allowed us to reduce the listed price.
Make a plan to prevent future mistakes by identifying your past ones during this time. You can sure that the next time, we’ll put aside 20% as a down payment and have a professional home inspector evaluate the property.
5. Recheck your credit report after seven years.
In seven years, your foreclosure or deed in lieu of foreclosure should be removed from your credit record. Create a mental note to review it later to confirm that it really did disappear from your report. Then, your credit score should increase and you can move on as if nothing ever happened.
It’s not the end of the world if your mortgage is settled through a foreclosure or a deed in lieu of foreclosure. With the correct planning and awareness, you can significantly lower the likelihood that it will ever happen again and emerge financially stronger than you were before.