Personal Finance – Life After Foreclosure

Okay. If your home was foreclosed on and sold on the courthouse steps, you feel like life’s dealt you a major blow. The devastation left by a foreclosure is overwhelming, and feels insurmountable.

You think life is over, you’ll never get to buy another home and you’ll be paying twice as much for rent as you ever did on your mortgage payments. There is, however, life after foreclosure.

You’ll need to put together a heavy-duty strategic plan to attack the financial dilemma you’ve gotten yourself into. Your credit is going to need an extreme makeover. It may take you a couple of years or so to get your credit back on track. After you do, though, you could be eligible to purchase a new home at a reasonable interest rate. You’ll need to complete the following steps in order to fight your way back to the American dream.

* First things first – Figure out why you went into foreclosure in the first place. Was it due to a job loss, unforeseeable situation – e.g., divorce or court proceedings, or life-threatening event? You can still remedy that in a relatively short amount of time, but, first, you have to get your income on track. Make sure you have a job that gives you an adequate income.

* Budget – You’ll need to put together a budget, and you’ll need a method to capture all the details – e.g., Quicken, Excel. Identify all your income and all of your expenses for an entire month. Consider how you can minimize your expenses. What you have leftover at the end of the month will be what you’ll use to pay off other debt and save for your mortgage loan.

* 80/20 Rule – Set aside 80% of what is leftover into a savings account to use for the down payment of a mortgage. As your savings account for your mortgage grows, put it into a higher yield CD. Put the other 20% into an account you will use to negotiate with your creditors. Don’t stop saving.

* If you are several months late paying your other creditors, then you’ll want to negotiate a settlement with them all, except for any secured debt – e.g., car loan.

* Annual Credit Report – Get a copy of your credit report. All three major credit reporting agencies are required by law to provide you with a free one annually. Note every creditor you owe and are late in paying. Make sure the information is accurate and start calling each creditor – the most recent debts first. Offer a settlement of 30% of the entire amount owed. Require that the creditor remove all negative notations on your credit report and note that the account was closed by you. Get all this in writing before you pay anything.

* Payment – Once you get it in writing, send a check noted on the memo line with, “Paid in full.” Note the signature area on the back of the check with, “By this signature, creditor acknowledges this account is paid in full.” If you do not, the creditor can legally continue attempts to collect the remainder of the debt.

* New Credit – While you are settling all your debts, open a credit card or two. There are innumerous ones available online. Some are very easy to get approved for. You may, however, have to opt for a secured credit card. Make sure you research all cards you are interested in before you apply for and accept any. You’ll need to understand all fees associated with the credit card – e.g., application fees, maintenance fees, late fees, over-the-limit fees. Once you receive your cards, write to each of your new creditors and request that all account activity be reported to the three major credit reporting agencies.

* Purchases – Make a purchase on each credit card and make sure you keep a balance for, at least, a year. After a year, request another free copy of your credit report from each of the three major credit reporting agencies. You may even want to pay for a credit score from one or more of them.

* Credit Reporting – When you get your credit reports, ensure that your recent account activities are being reported. If not, contact your credit card companies and request that they report it. You can also send your account information to the credit reporting agencies and request that they insert this information.

* After about two years, you will be ready to apply for a mortgage. Keep in mind, there are some companies who will not even consider you with a foreclosure on record. There are other options, though. The VA considers mortgages for those who can prove they have experienced unforeseeable hardship – e.g., divorce, medical emergency; however, you must show evidence that you are not at risk of falling back into a similar situation. In other words, you must prove that you are past the crisis and are now in an area of financial stability. Of course, there will be other companies you’ll want to consider. Just make sure you verify their reputation before you apply for a mortgage at any institution. Check their website to see if you find the Better Business Bureau’s (BBB) seal on it. That is a fairly good indicator that they are reputable. There are plenty of scammers out there, and you don’t want to fall prey to their tactics.

After you’ve followed all the steps necessary to repair your credit and save enough for a down payment, you should cautiously pursue one with a reputable lender. Be ready to explain any discrepancies on your credit report. In a down economy there are still opportunities to obtain a mortgage loan … even for someone who has been through a foreclosure!

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