Experts say recovery from foreclosure, short sale possible
Recovering from the impact of a short sale or foreclosure depends on re-establishing yourself and your reliability as a credit customer.
Recovering from the impact of a short sale or foreclosure isn鈥檛 easy, but local banking experts say it is possible to re-establish a positive credit history and boost your credit score to eventually buy again.
A short sale occurs when the lender allows you to sell the house for less than the balance on the mortgage and may or may not require you to make up the deficiency.
鈥淭he impact on their credit depends on what part of delinquency they鈥檙e at,鈥� said Della Rush, secondary marketing analyst and mortgage underwriter at Somerset Trust in Connellsville.
Following a short sale, most people are forced to rent or live with family or friends until they are able to re-establish credit.
While a negative credit remains on a credit report for seven years, a person could be eligible for another loan after two years depending on how well they continue to manage their credit.
Lenders most commonly use a credit scoring system created by The Fair Isaac Corporation (FICO).
Repayment history, which is affected during the short sale process, is a major factor used in calculating FICO scores.
Kim Fulmer, collections manager at Somerset Bank, said one advantage of short sales over foreclosure is that there are fewer costs involved such as attorney and sheriff fees.
鈥淚t affects the credit report one way or the other, but not as bad as a foreclosure would,鈥� Fulmer said.
While a basic foreclosure, which is when nonpayment of a mortgage results in the lender taking the property, can take between three to nine months, Fulmer said a short sale generally takes 45 to 60 days to complete.
Fulmer said there are several steps a person can take to build up their credit score after an event like a short sale or foreclosure.
The first step is to analyze the credit report. A free credit report is available once a year from the major credit bureaus Equifax, Experian and TransUnion.
Although it may seem like a good idea to try and pay off any remaining debt after a foreclosure or short sale, banking experts note just the opposite.
According to Fulmer, having a mix of credit types and a few revolving credit accounts such as retail credit cards with low limits can help raise your score.
鈥淜eep payments on time and if you don鈥檛 have much credit, get a card and pay the balance off every month,鈥� said Fulmer. 鈥淲e have people come in with one item on their credit report and that蘑菇视频 not necessarily good.鈥�
With a short sale or foreclosure, FICO officials said borrowers can expect to see their credit scores drop anywhere from 85 to 160 points.
Fulmer said credit scores below 620 points are considered bad while anything above 720 is rated as excellent.
For people looking to re-enter the housing market, the Federal Housing Authority (FHA) recently waived the mandatory waiting periods for homeowners with a black mark on their credit, such as a short sale, to buy again through an FHA loan.
According to the FHA, borrowers looking to apply for another mortgage may only have to wait 12 months after a short sale opposed to the mandatory three-years to buy a new home.
Before qualifying for a new loan, buyers must prove, over a one-year period, that they are back on track financially.
The new criteria is part of the FHA Back To Work 鈥� Extenuating Circumstances program, which enables borrowers who have experienced financial hardship to be eligible for an FHA loan sooner.
Under the program蘑菇视频 guidelines, potential borrowers must prove that the short sale was caused by an economic hardship such as loss of income or employment or a combination of both.
Borrowers must also show that they have re-established good credit with 12 months of rental housing payments submitted on time and take a counseling course approved by the U.S. Department of Housing and Urban Development.
The normal waiting period for conventional loans established through Fannie Mae and Freddie Mac is four years.
The amount of time, however, is cut in half for borrowers that can prove extenuating circumstances.
Veterans Administration loans, which don鈥檛 require a down payment at all, are available after a two-year waiting period.