5 Strategies to Rebuild Your Credit after Foreclosure

If you’ve been through a foreclosure, you may wonder if there is hope for you to become a homeowner again. The answer is yes, but it will take a while. [...] Here's what you need to do to rebuild your credit to qualify again for a mortgage.

Pay your bills on time: The FICO score, the dominant credit score used by lenders, gives the greatest weight to payment history, so make sure you consistently pay your bills on time. “Stability is the key,” said Craig Jarrell, president of the Dallas region of IberiaBank Mortgage Co. “Have you demonstrated that you are now capable of owning a home and paying the bills, and have recovered from whatever circumstance caused the original foreclosure?”

Review your credit report: You’re entitled to a free credit report once every 12 months from each of the three national credit bureaus—Experian, TransUnion and Equifax. You should get a copy and check it for any inaccuracies.

To get your free credit report, go to http://www.annualcreditreport.com. “Make sure it is about you and only you,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “If you find errors, dispute them. If you discover old debts, it will weigh in your favor to satisfy them. Paid late looks better than not paid at all. Make sure that debts older than seven years have rotated off your report, as these could be dragging your score down unnecessarily.”

Check your mortgage: You want to be sure that you don’t still owe anything on your old mortgage. Sometimes proceeds from a foreclosure sale aren’t enough to cover what’s owed on the mortgage, which would leave you owing the difference.

"Make sure there is a zero balance reflected, and if you are responsible for a shortfall, make arrangements to repay the remaining balance," Cunningham said.

Many lenders are willing to settle that "deficiency judgment" for less than what's owed because "it's better than getting no money at all," Jarrel said.

Apply for credit: In particular, apply for different varieties of credit. “Credit scoring models value having different types of credit,” Cunningham said. “Having some revolving accounts, typically credit cards, and some installment fixed-payment loans, such as a car payment, can improve your score.” But don’t apply for too much credit at once. “This can appear as though you’re desperate for credit and perhaps make lenders less inclined to extend credit to you,” Cunningham said. “Further, too many credit inquiries can have a negative impact on your credit score.”

Don’t fall prey: Watch out for credit repair companies that promise to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job—after paying a fee for the service. “The truth is, that no one can remove accurate, negative information from your credit report,” according to the Federal Trade Commission. “It’s illegal.” Only the passage of time can assure that negative, but accurate, information on your credit report will be removed.

When it comes to repairing your credit, there are no quick fixes, the experts say. What lenders want to see is responsible financial behavior over time.

“Know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has,” Cunningham said. “Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file.”

As published in The Dallas Morning News, 2010.

Accomplishing a Successful Short Pay Sale

What is a short pay?

A short pay is when an owner pays off a loan by paying less than what is currently owed on it. A short sale is the sale of a property such that it results in a loan being short paid by the owner. Both occur when the property is sold and the market value is less than the loan currently owed by the owner.

Until recently, few people knew much about short sales or short pays. Those real estate agents and attorneys who were active in real estate in the 1990’s are revisiting the now little-known practice of short selling property as an alternative to foreclosure. A short sale is also sometimes called a “pre-foreclosure sale.” However, not everyone facing a foreclosure qualifies for a short sale.

When should a home owner consider a short-pay?

For a home owner whose property’s market value is less than the total encumbrances they owe, and who is having increasing difficulty making the mortgage payment, a short-sale may be a good alternative to foreclosure. Know your options as a seller and you may not be forced to let the property go into foreclosure.

If you don’t qualify for a short pay, you may still be able to negotiate what is termed a work-out with your lender, whereby you agree to pay the balance of the debt upon the close of escrow. As a result of paying off the balance of the loan, you would likely have no negative credit reprecussions or other legal issues.

Contacting a real estate agent or attorney knowledgeable in the negotiation of short sales will start the process and help you figure out whether or not a short pay, with or without a work-out with your lender, is an option for you. Your agent should be well organized and informed to help you the most effectively. When you start this process, be prepared to answer many personal questions about your finances as that is the only way for a good agent to effectively assist you in evaluating your situation.

Who should consider a short pay?

Although a short sale may be best solution for some homeowners, it is not for those individuals who have some assets, a good job with garnishable wages, etc. This is why individuals considering a short pay off should seek advice regarding the advisability of proceeding in this manner.

How does one successfully complete a short pay?

In order to successfully negotiate a short pay, without a work-out on the balance of the loan amount, you will have to demonstrate that the probability of a foreclosure in your case is high. If it is, then the bank will consider you a candidate for a short pay. The package you submit to the lender will consist of all the supporting documentation illustrating your situation and your need for short pay approval. It is not enough to write a hardship letter alone, as most lenders will require proof of the reasons why they should approve your file. The lender will consider the following: illness of the borrower(s) when accompanied by doctor’s statements, death of a borrower(s), divorce or legal separation when accompanied by legal documentation from the court or your attorney, involuntary job loss with documentation and past check stubs, etc. In addition to the above reason(s) and supporting documentation you will provide the lender, they will also require complete financial disclosure of income and assets.

Most lenders will require that the entire package of information be submitted at one time. It is important to the lender that the file they establish on your case not be completed in pieces or sections. The main reason is that the loss mitigation department people, who are those that help us negotiate short pays, may have up to 200 files each at one time to process. As a result, they have no time to track down paperwork or people. If the file is complete, it gets moved to the top of their stack and pushed successfully toward approval. Many loss mitigation employees and negotiators are paid a bonus per approved file, or upon reaching a certain number of approved files. This is because in approving these short-pays and avoiding the foreclosure process, they are also saving the lender time and money.

As you start to think of what will comprise your package, it is also a good time to write a letter of authorization to your bank, referencing your loan number(s) and authorizing your agent to be in touch directly with your lender. Your real estate agent will be doing most, if not all, of the negotiating and following up on your file and this will facilitate that process.

After you have submitted the authorization by fax or email to your lender’s loss mitigation department, your real estate agent can then contact your lender directly. Some lenders will not send out a package with their checklists and forms before you have listed your home and received an offer. They really don’t want to take the time to consider approving a short pay if it doesn’t have an offer for them to review at the same time. Other lenders send out the package at the initiation of the process in order for you to get started. It is prudent to begin collecting your last two years’ tax returns, pay stubs, bank statements, financial statement, hardship letter, etc. whether or not you actually have received the lenders package.

This would be the time to put your property on the market. In order for you to accomplish your goal of short paying the loan, and especially if you are already in default on the loan, the property must be aggressively priced and marketed. It should be priced below what the comparables would suggest, and not at market value. When the first notice of default has been filed by the lender there is a clock that begins ticking and you will have a limited time to accomplish the result you want.

When your agent shows your property, he or she will explain to buyers and their agents that it is a potential short sale. Therefore, the response time from the bank will be slow after submission of an offer and that it may be a while before they hear whether or not the short pay has been approved. It may take as long as 6-8 weeks for the approval process to be completed!

A short sale purchase, though it may feel like a good deal to some buyers, is not for those who are faint of heart. It takes both perseverance and patience on the part of the buyer and their agent. Therefore, it is crucial that your agent explain this complex process in detail to the buyer and their agent, lest you find yourself accepting an offer from a buyer who within a couple of weeks feels the need to withdraw his or her offer. Your lender is an intricate bureaucracy and it will take time for your agent to maneuver the maze to obtain the desired results.

Once you and your agent negotiate a reasonable offer, you will sign it and your agent will get an estimate of closing costs based on the recorded liens, and the offer you have accepted. Your package will then be promptly submitted to the lender. After your lender has assigned a person to your file they will locate a broker to do a broker price opinion. This agent will be in touch with your listing agent and will need access to view the property as they prepare their report. A good listing agent will prepare a record of comparable sales to give the agent completing the broker price opinion for the lender when they meet them at the property.

It is your agent’s responsibility from that point on to follow up with the person to whom the package was submitted. The package may move from person to person before it is in the hands of the negotiator who will do a final review and approve the short sale. You hopefully will then receive a short pay approval letter and that is the point at which you can open escrow with the buyer and start the more conventional process of having their inspections done and their appraisal ordered and their own loan process started. The approval letter is usually only good for a certain number of days. If there was a notice of default filed and a possible trustee foreclosure sale scheduled, the escrow must either close before that sale date or, if it is practically impossible, then the negotiator will typically postpone the trustee’s sale 30 days or more if necessary to allow you and the buyer you have procured to close the escrow. There is a very narrow margin of error, which means that if the buyer you are in escrow with does not complete the sale within the allotted time, there is a good chance that you will not have a second opportunity to market the property and start the process again with another buyer before the trustee’s sale goes through.

What about the tax implications of a short pay?

There may be tax ramifications as a result of a short sale that vary from those of a foreclosure. Therefore, before you decide to go with a short pay, you may want to consult with your tax advisor about any tax liability.