Foreclosure is one of the most harmful things you could have on your credit report. It’s a big commitment that you essentially forfeit out of. As a result, potential lenders who see a foreclosure on your credit report often aren’t willing to lend to you.
How can you prevent a foreclosure from decimating your credit?
Consider Doing a Short Sale
Try not to let your house go to foreclosure. Often times a bank will be willing to take less than the full amount of your home by accepting a short sale instead.
A short sale involves first finding someone who wants to buy your property, then arranging with the bank to use the proceeds from the sale to pay off your existing debt.
Often times the sale amount will be for less than what the buyer would get on the open market, making it a good deal for them. It’s a good deal for you because you get to preserve your credit and it’s good for the bank because they get an easy sale.
It’s important to realize that a bank often loses more money if they foreclose on your property than if they accept a short sale.
If they foreclose on you, they need to pay for lawyers, possibly pay for an eviction, need to pay to fix the house up, risk tenants damaging the house when leaving and often have to sit on the house for months before it’s sold.
A short sale saves them all those costs. You find them a buyer, you handle the most difficult aspects of the deal and they just accept the money and sign over the deed.
Though a short sale does show up on your credit report, it’s much better than if you just defaulted on your mortgage.
What If You Can’t Do a Short Sale?
If you have no option other than letting your home go to foreclosure, immediately start rebuilding your credit afterwards.
In all likelihood, you won’t be able to get any kind of credit apart from a secured credit card. So start with that.
Open one or more secured credit card accounts and start using and paying them off every month.
You’ll still have to work with a highly damaged credit report for a few years. But the damage can be minimized if you immediately start to work on your credit rating.
If in four or five years creditors can see that you have several credit accounts open, none of them delinquent, that can do a lot to offset your foreclosures.
If you’re facing foreclosure, your first option should be to do everything you can to keep the home from going all the way to foreclosure. If there’s no other choice, then immediately start using credit building techniques to offset the damage.