Building Credit after Foreclosure

Foreclosures are sometimes unavoidable.  If you have foreclosed in the past 2 to 3 years, there is still some hope in becoming a homeowner again.  If you have been foreclosed upon within two years, then you do not qualify under the VA guidelines.  After this two year waiting period, the possibility of owning your own home is now possible. You may be able to receive financing for a condo or single family residence. Note that some lenders may require a longer wait period.

Getting your credit back on track after a foreclosure is a priority if you want to qualify for a VA loan.  If you are a non-active Veteran, make sure your work history is consistent.  You must have re-established good credit and have a stable job with income. Remember, even if your get your credit score back to within the VA guidelines, you’ll need to prove that you’ll be able to pay the mortgage.

To raise your credit score as high as possible to get a VA loan after a foreclosure in California, you will want to have some active lines of credit that show you have paid without any late payments after the foreclosure. Excessive late payments, collections, charge-offs, etc. after a foreclosure show the underwriter that you have not learned to manage your debt.   It can help to get your VA loan credit score as high as you can post foreclosure.  You’ll be amazed at how fast your credit score can rebound.

The longer the good payment history for any credit cards or bills, the better.  However, the duration of this good payment history should be at least one year. Setting up automatic payments for your bills will create a record of guaranteed payments made on time and at the same time each month showing financial responsibility. Just remember to have the funds to back up those automatic payments!

Another way to rebuild your credit is to open a CD. A certificate of deposit benefits the borrower in having a safe investment.  A CD can be opened with as little as $500 for as short as a few months. Some CD’s are expandable, meaning you can continue to add money whenever you are able to. It will earn interest for you during this time and is usually at a higher interest rate than a regular savings account.  Since a CD funds are not as easily accessible until the end of term, it acts more stable than a regular savings account that is easily withdrawn. But, if you are not able to open a CD, just open a savings account. To have some money saved in the bank as cash reserves while qualifying for a VA loan after a foreclosure shows the VA loan underwriter that you have a cushion should a job loss or illness occur.

Beware of going “all cash” after a short sale, bankruptcy or foreclosure.  You want to re-establish credit and by going all cash, you are not creating a credit history for the credit bureaus to follow. Credit cards and other bills establish that paper trail/credit history.

 Key points in rebuilding your credit after a foreclosure:

  • Have consistent work history
  • Establish  lines of credit with a history of payments on time
  • Set up automatic payments for your bills
  • Open a Certificate of Deposit