Rehabilitating credit after foreclosure

June 17, 2011

My husband and I lost our home to foreclosure in October 2007 after my husband lost his job. We really want to become homeowners again, and we’re wondering about the benefits of signing up with one of the nonprofit housing agencies that offers a fix-up-your-credit program. Would this be a good idea?

It sounds as though you are on your way to a recovery. That’s great to hear.

In the wake of the foreclosure crisis, secondary-mortgage market leaders Fannie Mae and Freddie Mac instituted a requirement to make homeowners who had been foreclosed on wait five years before being able to qualify for another mortgage. You’re almost at four years, so in another year you might qualify.

You might qualify sooner with an FHA loan, especially if you purchase a home that was foreclosed on by the Federal Housing Administration. You can shop for these “HUD homes” at HudHomeStore.com.

Get ready by pulling a copy of your credit history from each of the three credit reporting bureaus, Equifax, Experian and TransUnion. You can do this at their Web sites. You and your spouse are each entitled to one free credit report from each credit-reporting bureau once a year through AnnualCreditReport.com. Although your credit report is free, you’ll have to pay about $9 for a copy of your credit score.

Although it’s been four years since your foreclosure, you might find your credit history isn’t quite repaired yet. If your credit score is hovering in the 500 range, it will be tough for you to qualify for any loan. Once your credit score rises above 620, you’ll have a better chance, although you will still be considered a subprime borrower.

I don’t know what these nonprofit credit programs would do for you, so you’ll have to investigate each one. See what promises are being made and investigate the company carefully. How much does this program cost? Does it have special relationships with lenders that will allow you to qualify more quickly for a home loan? If you have to pay to participate, you might be better off waiting the year, saving the money, improving your credit and then trying to buy a house.

In another year or so, you should be able to qualify on your own. But if you’re ready to start looking, try to find an owner who is willing to do a lease with an option to buy (also known as a lease/purchase). You can rent the property for a year while you wait to qualify for a mortgage. Better yet, perhaps the owner will finance your purchase, and you will be able to buy immediately.

I’m in trouble with my house. I’m heading toward foreclosure unless I can complete a short sale quickly. Once we’re done with the property (either through foreclosure or after a short sale), can the mortgage company require me to use my retirement savings to reduce its loss? I have about $200,000 in an IRA, but that is my only retirement money.

In some states, lenders can’t go after their former borrowers if they took out a loan for the purchase of their primary residence and they used that home as their primary residence. In some cases, lenders are limited in their ability to go after borrowers if they have secured the loan on their home using a trust deed rather than a mortgage.

In other states, lenders have certain constraints in obtaining a judgment against their borrowers for deficiency judgments.

The real question for lenders is whether their borrower has the means to repay the amount of the deficiency or shortage from the sale. If the lender thinks the borrower has that ability and the amount is great enough, the lender may decide to go after the borrower.

You asked whether the lender can force you to liquidate your IRA to pay the lender. Generally, money invested in retirement accounts is safe from creditors, and your bank could not force you to sell your IRA to pay them. But a bank creditor could sue you for the amount you have failed to pay if the bank can get the deficiency judgment against you.

Although the bank can’t force the sale of your IRA, it can try to get money from you just as any other creditor might. The bank can try to find other accounts you have and might be able to garnish your wages. When a bank garnishes your wages, the bank obtains a court order forcing your employer to pay it a part of your wages from each of your paychecks.

Most lenders are focused on trying to stabilize their real estate portfolios, work with borrowers to limit the banks’ losses and avoid spending good money chasing bad debts, but it’s also possible that the bank could try to sell the deficiency debt left after a short sale to a debt collector. That debt collector might go after you now or in the future.

If a bank insists on having you pay a deficiency on the sale of your home through a short sale and the bank has the legal right to pursue you, it can and may attempt to continue to collect that debt but can’t force the sale of your retirement funds and assets.

Last, the bank and other creditors or collection companies risk losing their right to go after you for money owed from the short sale if you file for bankruptcy. We have seen an increase in bankruptcy filings during the recession, and we could see a steep increase if banks decide to go after the thousands of borrowers who have gone through a short sale.

—Tribune Media

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through thinkglink.com.

Comments
Show Comments
Most Read RealEstate