Foreclosures are at an all time high. Millions of people have had their American dream turn into a nightmare. There are few things as devastating than the loss of your home. As dark as things may look if you have faced foreclosure, all is not lost. It might not feel like it now, but there is life after foreclosure. If you follow a few simple steps, before long you can have your credit rating back on track and even qualify for another mortgage.
Step 1 – Regain control of your financial state
When your finances are out of control, everything in your life will follow suit. If you are facing foreclosure, then it is safe to say that something in your financial plan has gone horribly wrong. It could be that someone lost a job or they borrowed too much and the payments are unmanageable; it could be a combination of factors. Regardless of the reason, the valuable lesson to take away from the experience is that you have to be more prepared. Being prepared financially starts with a budget and a shift in focus.
In order to turn things around and regain control of your financial state, the focus must shift from being able to pay for all of the things that you have, to only having the things that you can comfortably pay for. Prepare a realistic monthly budget and stick to it.
Step 2 – Rebuild your credit rating
If you have credit cards before you went into foreclosure, chances are they are maxed out and have had some late payments. To turn it around, first you have to stop using them, and then you have to start paying them off. If you do not have any credit cards, you must establish credit. If you have trouble qualifying for an unsecured credit line, look into a secured credit card through your bank. Use them sparingly and pay them in a timely manner.
Revolving credit lines are a double edge sword when it comes to your credit rating. You must have open and available credit accounts to have a good credit score; however there cannot be a large balance and you must make monthly payments on time. Remember that a credit rating is a number that represents how big of a risk you are to lend money to. In order for the bureaus to determine that, they need to see that you use credit responsibly. For the best impact on your credit, keep the balance on your credit card account to less than 25% of the card limit and make all monthly payments on time.
Step 3 – Start saving
Creating a budget is one piece in developing your financial safety net. Saving is another crucial piece, especially if your goal is to qualify for another mortgage in the future. A successful monthly budget includes a budget for savings for the everyday issues, as well as a down payment for another home. Before you worry about future homes, make sure that you build up a cushion of savings that will protect you from facing other financial losses such as repossessions and evictions when faced with the loss of income or unexpected financial expense.
Step 4 – Sit tight
Once you have gotten control of your finances and are making your payments on time, the next step is to keep on doing what you are doing. Time is going to be an essential part of regaining your credit rating. Paying your bills on time and proving your ability to maintain control of your use of credit over a period of time will consistently increase your credit worthiness with each payment you make on time. You can expect to require two to four years before you will qualify for another mortgage, but if you maintain your budget and keep your payments on time for that period you will qualify for some very good mortgage programs.
Step 5 – Stay within your means
After working so diligently to regain your credit status after a foreclosure, the last thing that you want to do is get in over your head with your second chance. You must stay within your budget and maintain the ability to save with your new mortgage to avoid falling into the same financial traps that contributed to the foreclosure. Staying on track with your budget and living within your means is the best way to rebuild an impeccable credit rating.
Any other suggestions for those trying to move past a foreclosure? Leave a comment below!