How to Recover After a Foreclosure

Do one thing: Losing your home to foreclosure can be devastating. Fortunately, there are housing counselors available to help pick up the pieces. Find resources via the U.S. Department of Housing and Urban Development’s counseling locator at 800-569-4287.

As difficult as it can be to lose your home in a foreclosure, the path back to financial solvency is often riddled with stigma and struggle. If you find yourself in this situation, take heart. There are ways to rebound after such a setback, by doing a few key things to help ensure a smoother road ahead.

Financial advisor Andrew Van Alstyne suggests proceeding slowly as you work toward financial wellness. “It MUST be about baby steps,” he says. “Nobody got into whatever financial predicament they are in overnight. Slow, steady, intentional actions will be the pathway to success.”

Foreclosure’s Impact

While specific laws vary by state, a foreclosure is a legal proceeding where a lender takes back property when a loan isn’t paid for a specified period of time, often three to six months. Foreclosure information typically stays on your credit report for up to seven years from the date of the foreclosure, notes the U.S. Consumer Financial Protection Bureau (CFPB). 

Follow these steps to build a stronger financial future for yourself following a foreclosure:

Know Where You Stand

While it might sting, it’s important to know exactly where you stand regarding your credit score and credit report, which are two different things. According to the credit bureaus, a foreclosure will hurt your credit score, lowering it by 100 points or more. Generally, someone with a lower score before the foreclosure will lose less ground than someone who had a higher score previously. Many major credit card issuers now offer users a credit score on their monthly bill.  

Check (and Correct) Your Credit Reports

As noted above, a foreclosure will likely remain on your credit report for seven years before dropping off. Free weekly credit reports are now available from the three major reporting bureaus – Equifax, Experian, and TransUnion. Visit annualcreditreport.com to access your reports. Those with the SavvyMoney tool also have free access to their report through online banking. When you get your credit report, go line-by-line through the document to make sure everything is correct, including how your name is spelled. Promptly report any errors to all three bureaus.

Create a Budget

One of the great things about building a budget is that it can help you live below your means permanently. As in, you’ll be less tempted to spend more than you make after creating a weekly spending plan. After reviewing exactly how much money you have coming in and going out, it’s time to set up some parameters. 

An effective monthly budget could look something like this — with the understanding that each situation is different, and that’s okay.  Just try to preserve your ability to meet the savings goal: 

• 35% for housing. That should include a mortgage or rent, maintenance, insurance, taxes, and utilities.
• 12.5% for transportation. This should cover car payments, fuel, insurance, repairs, parking, and tolls, plus bus or train fares.
• 12.5% for debt repayment. Think credit cards, student loans, Buy Now Pay Later plans, and any other debt you have beyond a home or auto loan.
• 15% for savings (you can nudge your way up to this number if you’re not there yet.) This is money you should set aside for an emergency fund, plus retirement, college, and other money goals.
• 25% for miscellaneous expenses. This is for groceries, entertainment, clothes, trips, etc.

Can You Buy Again?

It’s important to note that even those with less-than-stellar credit still have options when it comes to buying a home. Even those with a bad credit history or a low credit score may qualify for a Federal Housing Administration (FHA) loan, according to the CFPB. It’s also possible to qualify for what’s known as a subprime mortgage, but those typically come with higher interest rates than conventional home loans. Before jumping into another mortgage, consider the costs and risks of the loan and compare that to what you may qualify for after waiting a while and building up your credit score.

The Bottom Line

Leaning on like-minded people is another way to help follow good financial habits long term. That can mean surrounding yourself with others who live within their means, talking about budgets and money openly, and seeking ways to have fun without spending a fortune. Spending less money than you make is a lifestyle choice that often leads to less stress, more emergency savings, and the confidence to know you can create the life you want without going into debt to get there. 

With reporting by Casandra Andrews