Q: My family and I have found ourselves in a situation we never thought we’d be in.
We are heading for a foreclosure on our home. We bought our house in 2005, at what turned out to be the top of the market, and now we’re so upside-down it just seems like we will never get ahead.
Still, we tried to hang on, until my wife lost her job just before Christmas. We couldn’t make the January payment and we just got a letter saying that the bank intends to foreclose.
I know you’ve written extensively about foreclosures and such, but my question is pretty simple.
Can you tell me how long the foreclosure will stay on our record? We would like to have an idea so we can make plans for buying another home in the future. Thank you in advance.
A: Your question is extremely relevant today. But not as simple as you may think.
That’s primarily because lending guidelines are in a constant state of flux. How long a foreclosure stays on your credit report isn’t really relevant to your ability to buy another home. However, the fact that you had a foreclosure at all, combined with your credit score, is.
In a nutshell, here’s how it works.
When you lose a home, regardless of whether it’s through a short sale or a foreclosure, you take the same hit on your credit. FICA, the gods of your credit score, don’t really care. They are looking at your loans.
What they see are loans that were secured by real estate that were never paid off.
The “hit” can be less than 100 points on your credit score, depending upon what your score looked like at the moment you lost the house.
However, a much bigger impact comes from the number of payments you missed along the way.
Regular readers will recall that a bank can foreclose in as little as six months and 20 days after a homeowner misses their first payment. Of course, few banks are moving that fast nowadays, although the rise in short sales, and the resulting decrease in foreclosures, means they are moving faster.
So let’s assume it will take your bank 10 months to get around to foreclosing. That means 10 months of missed payments.
And every month you miss a payment, your credit score is taking a hit.
In my example, that’s 10 or 11 missed payments. At that point your score is already down in the 500s by the time you no longer own your home.
It’s likely that, if you do everything right, it will take four years or more to rebuild your credit to a useable number. It’s strictly a function of your credit score.
A relatively new wrinkle in the process comes from the banks placing new restrictions in their loan qualification requirements.
The federal government came out with standards a year ago that sought to punish homeowners who lost a home through foreclosure, but reward them for doing a short sale.
Recently, more and more banks are picking up similar versions of these requirements.
It goes something like this.
If you went through a foreclosure, you may be disqualified from getting a new mortgage for five years.
However, if you sold through a short sale but missed some payments along the way, there would be a two-year disqualification period.
But if you can short sell and not miss any payments, something some lenders will let their customers do, there might only be a one-year disqualification.
Of course, your credit, income, expenses and cash on hand still have to meet the normal requirements.
So if you want a rule of thumb for planning purposes, I suggest you give yourself five years.
But I have to add that it’s certainly not too late for you to list your property for a short sale. Doing so could knock years off of that five-year projection.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column you can contact him at [email protected]