A fall in home prices, the subsequent recession and the high rate of unemployment resulted in a number people defaulting on their mortgage payments. Bankruptcies and foreclosures followed as a consequence of people defaulting on the principal and the interest payable on home mortgages. Since a consumer's payment history is one of the most important factors that affects the computation of credit scores, a foreclosure was bound to have a negative impact on the credit rating of the erstwhile homeowner. Hence, the issue of improving credit scores after foreclosure has assumed a great deal of significance.
A lender can initiate foreclosure proceedings and complete the entire process outside the judicial system, assuming that the mortgage deed has a power of sale clause. In the absence of a power of sale clause, the lender has no option but to take the borrower to court. In other words, a judicial foreclosure is to be expected. Regardless of the nature of the proceedings, the details are listed in the public record and the credit report of the consumer. The information remains firmly positioned in the consumer's credit report for a period of 7 years.
As mentioned earlier, the credit score of the consumer declines by 350 to 400 points as a result of a foreclosure sale. Although a besmirched credit report and a low credit score is a double whammy, a number of creditors give due credence to the consumer's efforts to improve credit scores. Good credit scores are a must for procuring loans at a favorable rates of interest, for availing insurance, and for the sake of applying for jobs that require the applicant to shoulder managerial and financial responsibilities.
Improving Credit Score Post Foreclosure
In order to improve credit scores after foreclosure, one should avail either installment or revolving credit and make it a practice to pay off the interest on a regular basis. Establishing a history of regular payments can go a long way in helping the consumer build his/her credit scores. The same approach can be adopted by a consumer who is interested in improving credit scores after bankruptcy.
Secured Credit Cards
People can opt for secured credit cards to rebuild credit, since consumers can be approved for these cards within 6 months of a foreclosure sale or a bankruptcy discharge. These credit cards are secured by a CD that acts as a collateral for the credit card companies. The line of credit is usually 50 to 100% of the amount of the deposit. A practice of repaying the entire balance on the credit card on a monthly basis will result in the credit card companies extending additional lines of credit to the consumer without any further deposits as collateral.
A secured credit card gets converted to an unsecured credit card within 18 months, assuming that the consumer is careful with the payments. The net effect is the increase in the credit-utilization ratio and a marked improvement in the credit rating of the consumer as a consequence of availing revolving credit.
FHA Insured Loans
People whose homes have been foreclosed, are required to wait for 3 years from the date of a foreclosure sale to avail an FHA insured loan. Assuming that the consumer gets approved for a secured credit card and brings up his/her credit score to 620 points, FHA insured loans can become the stepping stone for further improvement in credit scores.
The Federal Housing Administration (FHA) provides government insured mortgages that protect the lender in case the homeowner defaults on mortgage payments. Thus, the consumer can avail a mortgage by down paying just 3.5 percent of the purchase price of the home. This installment loan is a fixed-rate-level-payment mortgage that does not require the borrower to pay the premium for private mortgage insurance (PMI).
These measures are not only useful for consumers who are interested in improving credit scores after foreclosure, but also essential for people who are desirous of improving their credit rating after debt settlement, since a debt settlement does not completely erase the delinquent information from the consumer's credit report. The net result is a good credit report and satisfactory credit scores.