Financial Overhaul: How Long Does It Take to Get Your Credit Back After a Mortgage Foreclosure?

Financial Overhaul: How Long Does It Take to Get Your Credit Back After a Mortgage Foreclosure?

There’s no way to spin it: losing your home to foreclosure is a bad thing — but you could be well on the road to credit recovery within a few years. Home mortgage lender William Malamut says that to some extent, your fate is in your own hands. “All cases are unique,” he advises, so one homeowner’s tale of woe might not match your own experience. How quickly your credit rebounds can depend on your own involvement in repairing your history.

Monitor Your Credit Report

When the foreclosure dust settles, roll up your shirtsleeves and get to work. The bad news is that the foreclosure itself is going to appear on your credit report for seven years. It shows up in the section labeled “Public Information,” which chronicles any judgments against you. The good news is that your foreclosure doesn’t exist in a vacuum. It’s just one of many things that contribute to your overall credit score. Your mission is to tackle other issues that you have some control over.

The three major credit reporting agencies — Experian, TransUnion and Equifax — are obligated to provide you with a free credit report once a year. You might also want to purchase reports at the six-month mark as you monitor your credit going forward. It’s important to get reports from all three major agencies so you have a broad overview of your credit standing. It’s possible that some creditors might report to one agency, but not another. With frequent reports, you’ll be able to see your progress in black and white as you work to repair your credit, and there’s something to be said for morale when you’re involved in a multi-year challenge. You’ll also spot any inaccuracies relatively quickly. If incorrect information shows up on your credit report, Malamut suggests contacting either the creditor or the agency. Dispute the item that’s incorrect. Make sure your credit reports reflect only your own activity and not something you were never responsible for in the first place.

Use That Extra Cash

If you’re like many people, your mortgage took a big bite out of your earnings. Since you’re not laboring under that liability any longer, turn it to your advantage. You still need a roof over your head, but consider downsizing for a period of time while you repair your credit. If your mortgage payment was $2,500 a month, and if you can secure a rental for $1,200 a month, this frees up $1,300. The $2,500 was obviously a tough nut to crack or your lender would not have foreclosed, but even after you deal with your other must-pay bills, you might be able to free up hundreds of dollars a month, which you can use toward shining up your credit. “There are specific time frames required to get a new mortgage,” Malamut says, “and these time frames vary depending upon the type of mortgage loan requested.” It’s probably going to be at least two years before you can qualify again, however, so use the time to your best advantage. Make sure you make at least minimum payments on all your other open accounts every month. Because you can’t get rid of the foreclosure on your credit report for seven years, you’ll want the rest of your report to look as good as possible. Pay off any closed accounts and get rid of them, and then keep the others current.

Adjust Your Credit Utilization

Credit utilization makes up a whopping 30 percent of your credit score, so if you get this under control, it will go a long way toward helping you bounce back. Credit utilization is the difference between how much credit you’ve been extended and what you’ve actually borrowed. For example, if you have a credit card with a $10,000 limit, it looks better if your balance is only $5,000 and the card isn’t maxed out. If possible, pay a little extra on the accounts that are close to their limits and save your minimum payments for accounts that have some room on them. You don’t want to go overboard and start paying off and closing out accounts, however. A balance of different types of credit is important to your score as well. If you have only a few installment credit accounts, such as car loans, and no credit cards, you might actually be better off with one open credit card that you can pay regularly.

Beware of Credit Repair Scams

When your foreclosure becomes a matter of public record, you’ll probably receive a lot of offers from credit repair experts who can guarantee you a perfect credit score in 10 days or your money back. “There’s no set time frame for credit repair,” Malumut warns. “It can take months or years.” It’s not going to take just a few weeks, however, so if someone promises you they can achieve this — particularly for a fee — you might want to run in the other direction. If you don’t feel equipped to tackle the challenge of repairing your credit on your own, the Department of Housing and Urban Development approves certain housing counseling agencies that can assist you free of charge. A state-by-state list is available on HUD’s website.