You see, foreclosure, in the days of yesteryear, was the end of the road for most homeowners; it was almost like the proverbial “Black Spot” of the world of finance. Most people who had been foreclosed on were almost never able to buy a home again and were almost always denied for loans of any kind. It was a dark fate, one that would haunt a person for years. Luckily, however, today that dark fate isn’t nearly as dark as it once was. “But how?” you may be asking. Well, let’s take a moment to talk about the current trends and attitudes in real estate when it comes to foreclosure.
WARNING: we do not claim to be experts in finance, we are simply trying to give you a basic understanding of what might be possible for you after a foreclosure. Your actual results may vary.
What it used to be like to try and buy a home after a foreclosure
Up until the past decade, someone who had a home foreclosed on was pretty much out of luck. They were labeled as ‘unreliable’ or ‘irresponsible’ with their money and most bankers would want to lend to them, potentially forcing them to rent a home or an apartment instead of buying a home. A foreclosure was a terrible thing and it would tarnish a person’s reputation and make it nearly impossible to recover financially.
The only hope that was there for someone who had been foreclosed on would be the 7-year rule. The 7-year rule was, and still is, a standard that most financial institutions follow that states that a person’s credit score and financial reputation was only measured by the past 7 years of financial history. So, essentially, your credit score and financial standings were only calculated using information from the last 7 years (this doesn’t count when it comes to outstanding debt, however).
The 7-year rule, though it was long, was a great thing— it offered those who had a home foreclosed on a chance to redeem themselves and start over. The only problem with it though was the fact that they still needed a place to live during that 7 years. For most people, an apartment or rental home would be the best option. But, what about those for whom renting isn’t an option? What were they to do?
Luckily, in our day, the 7-year rule is not the only way that someone can get into better financial standing. With the recent recession of 2008 and 2009, it has been increasingly more likely to have someone foreclose on their home. With it being more common there became more demand assistance and programs for those who have had a foreclosure who also need to buy a house again soon. This means that if you have been foreclosed on, there is still hope for you—you may be able to buy a home after a foreclosure before the 7 year rule kicks in.
To buy a home after a foreclosure it is best to work closely with a lender
The first, and best suggestion for someone who wants to buy a home after a foreclosure is to work closely with their lender of choice. If you come to a lender and tell them that you want to repair your financial reputation, they will be pretty likely to help you. That being said, there are some that may not help you. Once you have found a lender that is willing to guide and help you, you will want to give them all the information you can and take any advice they give you. They will be able to better assess your situation and give you better ideas for what you can do to get into a position where you can buy a home.
To buy a home after a foreclosure you need to boost your credit score.
What exactly is a credit score?
Your credit score is one of the most important numbers in your life, for reasons we will explain a bit later, especially when it comes to buying a home after a foreclosure. The credit score, for those of you who don’t know already, is essentially your financial grade— like in school. When a student goes to school, they are assigned grades that, in an ideal world, reflect their knowledge and effort in the subject they are studying. The credit score is very similar, but it is for your finances. You see, when you pay your bills on time (especially those bills for credit cards and loans) your credit score goes higher and signals to banks that you are responsible with your money. If you are seen as responsible by the bank, they are more likely to lend you money because there is a high likelihood that you will pay it back. However, on the flipside, if you don’t pay your bills on time, or not at all, then your credit score will go down, you will be seen as irresponsible with your money, and the bank will not want to lend you money for fear that they won’t get it back. Now, the reason that is important is that a foreclosure hits your credit hard and leaves you with a pretty low credit score, one that you will need to raise if you want to buy a new home.
How do I raise my credit score?
REMEMBER, WE ARE NOT FINANCIAL PROFESSIONALS
Aside from paying off as many of your debts as you can and paying all your bills on time, the best thing to do when you have been foreclosed on is to go to a bank and get what is called a secured credit card. This is like a normal credit card, but you have to front the money ahead of time. So, for example, if you are offered a $100 credit limit for the secured credit card, you must give the bank $100. You will get this money back when you close the account (most of the time). When you use the credit card, you are essentially borrowing from that $100 instead of from the bank like you did before.
Once you have the secured credit card, we suggest you only use it when you buy groceries and then you pay it off almost immediately. It will show that there is money being borrowed and then money being repaid. Be sure not to buy more with your card than you would have normally been able to afford with the money you have in your account though. That way you don’t end up in more debt.
We cover a lot more ways to raise your credit score in a few of our other blogs, so be sure to check them out before you leave. Or, you can give us a call here at the Hughes Group today and we can give you some more advice on how to buy a home after a foreclosure.