Recovering from a foreclosure is a difficult task. In addition to the trauma of losing your house, it diminishes credit scores by 85 to 160 points and makes finding a new place to live even more difficult. Although this severely impacts your ability to qualify for new credit immediately afterwards, it is possible to bounce back financially and repair the damage within a few years.
A foreclosure can drag on for several months to years. Loans remained delinquent for nearly three years before completion of the foreclosure process in some parts of the country as of mid-2013. Even before the process is completed, the tally of missed payments wreaks havoc on credit. Borrowers who save some money during the foreclosure process and transition into affordable housing usually have an easier time getting back on their feet.
If you were foreclosed upon between 2008 and 2011, you may be entitled to a lump sum payment through the National Mortgage Settlement Act. This requires proof that you were foreclosed without proper procedures being followed, or had loans which originated as a result of questionable lender practices. As of June 2013, borrowers who submitted claims for settlement funds from the country's five largest mortgage servicers can expect about $1,480, according to the Attorney's General settlement website. Additionally, borrowers impacted by foreclosure mismanagement may also receive a settlement payment for the Independent Foreclosure Review, a separate agreement with payments scheduled from April through July 2013.
Active-duty servicemembers have unique legislative protections from foreclosure, and therefore additional recourse if they lost their homes. The Servicemembers Civil Relief Act requires that lenders obtain a court order to foreclose and renders a foreclosure sale without court approval invalid. Servicememebers who underwent foreclosure in 2009 and 2010 may be entitled to lender settlement payouts of $125,000 for the mishandling of their foreclosures, according to the National Association of Realtors. Although borrowers initially had the opportunity to request a review of their foreclosure handling, lenders eventually extended the settlement automatically to include all of the affected borrowers.
Your best bet for financial recovery after a foreclosure is to keep your housing and total monthly expenses at healthy levels. This means applying 30 percent or less of your gross income towards rent and no more than 44 percent of your income towards housing and monthly debts combined. Foreclosed borrowers have more difficulty finding replacement housing because of severely diminished credit and increased deposit requirements by wary landlords. Many lenders offer "cash-for-keys," a monetary incentive that typically equals a few thousand dollars. Under the agreement, the borrower moves out by a specified date and can use the money to cover transition costs.
A foreclosure remains on your credit report for seven years and its impact on scores diminishes over time. By keeping all other credit accounts in good standing, your score may start to get better in about two years. Good money management is necessary to repairing credit, as it keeps the foreclosure an isolated event. Foreclosure takes much longer to get over when coupled with other derogatory accounts or a bankruptcy.
- NationalMortgageSettlement.com: Payments to Borrowers to Begin June 10, 2013
- CNN Money: How Foreclosure Impacts Your Credit Score
- My FICO: How Long Will A Foreclosure Affect My FICO Score?
- Loan Processing Services, Inc.: LPS' April Mortgage Monitor: Judicial States’ Foreclosure Sales Rate Highest Since 2010; Loans Still Delinquent Nearly Three Years Before Sale
- Bills.com: DTI: Debt-to-Income Ratio Information
- Nolo: Foreclosure Protections & the Military: When a Servicemember Gets a Mortgage Before Active Duty
- National Association of Realtors: 4.2M Borrowers to Start Receiving Foreclosure Payouts
- Bankrate.com: Life After Foreclosure