Start Repairing Your FICO Scores Now

Debbie Bremner November 12, 2009

As we said in our last post, credit ratings are taking serious declines due to mortgage failures that have occurred during the last 3 years.  As a Certified Home Retention Consultant and a Certified Short Sale Specialist, I have seen this from the front lines.  But the good new is that it is never too soon to begin repairing your credit.  Follow these steps, and you can soon be back where you were.

Whether you were able to persuade your lender to accept a payoff for less than what you owed by taking advantage of a short sale, or if you lost everything to foreclosure, if you start rebuilding your credit now, you might be able to buy another home in as little as two years.

It’s more than likely that if you’ve attempted a short sale, foreclosure or bankruptcy, the rest of your credit has gone to seed as well. How you handled that process will have directly impacted its outcome, so let’s assume that you acted swiftly and honestly with your lender, and had a good outcome.  What to do now to start repairing those FICO scores?

* Review your credit report. You can’t know where you are going until you know where you are. Call us at TheBremnerGroup.com to get a free credit report, or use an online service such as www.annualcreditreport.com, and look it over for accuracy.

First, make sure that the information in your file is about you and only you, not someone who has a similar name or a similar Social Security number. Next, look for items about you that are simply erroneous.

If you find mistakes, dispute them. If you discover old debts that haven’t been paid off, satisfy them as soon as you can.

* Beware of credit-repair scams. By all means, don’t pay someone to wipe away the negative items in your file. If they don’t follow through, the damaging items will reappear in two or three months.

* Check the status of a short sale. If your mortgage lender has accepted a payoff for less than what you owed, make sure that the account reflects a zero balance rather than the difference between the outstanding balance and the sales price.  Be clear with your lender as to whether the short sale is a recourse or non recourse transaction.

Don’t assume that your short sale carries no further obligations. Some lenders are filing deficiency judgments, while others are selling the bad debts to investors who then go after borrowers. Also, speak with your tax professional; the IRS may be able to tax the difference as income.

If you are responsible for the remaining balance, make arrangements to repay, follow your repayment plan and make sure the lender carries your account as current.

* Be aware of the effect of foreclosures, bankruptcies and short sales. Bankruptcies tend to have a greater effect on a credit score because they typically involve more than one account, whereas a foreclosure involves just your mortgage. But either way, there’s nothing you can do about these extremely weighty black marks against your credit except ride them out.

Bankruptcies and foreclosures remain on your credit report for seven years (10 years for a Chapter 7 bankruptcy). But as these items age, they have less and less of an effect.

Just a few years ago, underwriting rules were so loose that you could buy a house just 24 months after filing for bankruptcy. But now, you have to wait five years after the bankruptcy is dissolved,( not just from the filed date) and seven years if you’ve filed for bankruptcy multiple times.

Lenders tend to look more kindly on applicants who have sold homes via a short sale. In fact,  you may be able to get another mortgage in as little as 24 months if you truly hadextraordinary circumstances.

* Maintain checking and savings accounts. Your future mortgage lender will probably want to see two or three months of bank statements.

* Stay current on credit cards.

* Apply for new cards. Having two or three revolving accounts, typically credit cards and an installment, fixed-payment loan (say, for a car), can improve your score, as long as you are current.

Also consider a secured credit card, one backed by a deposit you made with the institution issuing the card. Speak to your local banker and your financial advisor for counseling in this regard.

Don’t apply for too much credit at one time. Too many credit inquiries can have a negative effect on your score.

* Take out a small loan. A personal loan from a bank or credit union can serve to reestablish your credit.

* Make sure that your accounts are reported. After going through all this trouble, it would be a shame if your lenders did not report your on-time payment status.

Do all of the above, be diligent, and the payoff will be that in a short period of time you will be on solid, stable financial ground again.

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