Free from foreclosure: what to do afterwards
Six ways to rebuild your financial situation and lay the groundwork for a successful future.
One in every 200 homes each year experiences foreclosure, according to a NeighborWorks report. And it will likely be one to three years before they can qualify for another mortgage to purchase another house. After foreclosure, you have the freedom to start over with your housing goals and priorities. Moving on from an unaffordable house payment allows you to rethink your housing situation. Foreclosure on your credit report generally reduces your credit score by 100 points or more, according to nolo.com, so it is also time to recover financially and address any debts.
According to the Starting Over After Foreclosure Toolkit, the unit on Rebuilding Your Financial Situation and Credit History covers six topics to rebuild your financial situation and lay the groundwork for a successful future.
- Understand the result of your housing situation: How did your outcome—short sale, deed-in-lieu, or foreclosure—affect your personal credit report and score? Ask your lender if you still owe mortgage debt or was it forgiven. What are the income tax implications?
- Confirm your current financial situation: What is your new budget and priorities for spending and saving?
- Make a plan to pay down remaining debt: Create a plan to stay on track with rebuilding credit. Use a method to track your expenses and control your money. Choose a debt pay-down strategy, such as:
- “Debt Snowball”: List debts in order of total balance. Start with the smallest debt first to reduce it as quickly as possible. Apply any extra funds to the next debt. Once smaller balances are gone, apply that money to the balance with the highest interest rate.
- Highest Interest Rate: Prioritize your list of debts by interest rates. Pay first on the debt that has the highest interest rate and continue paying until it’s paid off. Then, add any extra funds to the second highest interest rate loan or credit card.
- Power Payments: can be made in a variety of sequences including starting with debts with the highest interest rate first, smallest balance first or shortest term first. While paying off debt, The Utah State University Extension PowerPay website provides a free personalized debt analysis.
Staying on track to rebuild credit after foreclosure requires patience and keeping your goals in mind. Over time, negative information on your credit report will lower the influence on your credit score. For more information on how negative credit items can influence your credit score, visit my FICO. and MIMoneyHealth.org.
Michigan State University Extension has HUD/MSHDA certified housing counselors on staff to assist with the difficult process of foreclosure. To find a counselor near you visit the MI Money Health website or call your county extension office. Michigan State University Extension has released a new toolkit for homeowners who are experiencing or have previously experienced foreclosure. This toolkit will equip these individuals and families with tools to help them recover their financial stability, in the case that a recovery of their home is not possible. The toolkit is available to download free at the MI Money Health webpage.