Foreclosure or Bankruptcy, it is a rough choice either way. Both affect your credit report in a negative way. Many U.S. Homeowners have to make this very difficult decision. Who can blame them if they choose a foreclosure? Does it make sense to keep paying on a home that continues to have its value go down, while there are other credit accounts that can be kept in good standing?
In a bankruptcy situation, you are faced with many bad accounts including the mortgage. In a foreclosure, it is far easier to get your credit scores to rebound and to show reestablished credit history. This is especially true if you continue to make your other consumer debt payments like your credit cards, car loan, and student loans etc.
If you have decided to let your home go into foreclosure instead of filing for a bankruptcy your credit scores will likely go down once your payments fall behind. However, it is not the end of the world with regard to your credit report and scores; you can recover. So that you are prepared for the long haul, you should know that a bankruptcy will stay on your credit report for 10 years while the foreclosure will only stay on your report for 7 years.
No mortgage lender wants to see a credit report that has a foreclosure on it, but with what has happened in the overall mortgage and real estate markets nationwide in 2007-2008, getting a loan in the future might not be as hard as it may seem. Following a foreclosure it typically takes about 2 years to get your credit scores back up to where they need to be to qualify for a prime conventional mortgage. The time to recover from a bankruptcy with regard to your scores is around 3 years. In either case, you are not going to be eligible for a prime conventional mortgage from Fannie Mae or Freddie Mac for at least 2 years.
Rebuild Credit After Foreclosure
Keep all other credit accounts paid on time as agreed. This is paramount for getting your overall credit report and your scores back on track. The credit bureaus are going to be super sensitive to your situation if you have a foreclosure. One slightest missed payment or late payment will further drop your scores and make it even longer for you to recover. The other thing you will want to do is make sure you do not run your credit balances up. The credit scoring system will be really watching for you to keep control of your credit. A rule of thumb here is to keep your balances under 10% of the limit on the card. For example, if you have a credit limit of $1,000 on a visa charge card, you will want to keep your balance less than $100. It’s okay to go over that amount in a month, just make sure you pay it off as soon as possible.
Enter a detailed explanation on your credit report. You are allowed to make a statement that will be a permanent part of your credit report. You will have to submit the same information to each credit bureau – Trans Union, Experian, Equifax to make sure each of them note your file. You will not be able to get your score changed with this information; it will be read by anyone looking at your credit report. State the facts about your foreclosure as this is likely to help you look credible in the eyes of a lender.
Review your credit report 60-90 days after your foreclosure. Here you want to be looking to make sure that the information reported by any of your creditors is incorrect. You really want to pay attention to your foreclosed mortgage account. Even though creditors are supposed to report things accurately, this is often not the case. The dates could be wrong, they could still report a balance due, or make it look like the account is still not being paid. There are many things to look out for.
If you find something that is wrong, you will want to get it fixed right away. Make sure you contact the credit bureaus directly as they have to take action on your credit report with 30 days of your dispute. To dispute something make sure you have documentation to support your side, and you will want to make photo copies of anything you send to the credit bureaus. If you try to go to the creditor you could literally spend months maybe even years to get it fixed – remember you stopped paying them – even though there are laws to protect you – they still can make things difficult for you.
If you do these things: pay your bills on time, keep your balances low, make an comment or explanation about what happened on your credit report, and review and fix any errors on your credit report as soon as possible after the foreclosure then your scores and credit will rebound. There will be a day in the future if you do these things that you will be able to get a mortgage again after your foreclosure.