Facing Foreclosure? Read This 5-Step Survival Guide

Paper house on cracked earth, crisis concept
If you have had to handle a housing foreclosure, you know these events can be both stressful and financially devastating.

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During the Great Recession, some parts of the country were hit harder by the subprime lending and the crash than others. Or you may have a problem reflecting a more recent trend (I’m looking at you, COVID-19).

Even with things are doing well, certain areas see lots of foreclosures.

During the summer months of 2018, for example, foreclosure rates were reported to have increased in 22 states and roughly half of the 450 major metropolitan markets one property tracking agency studied. States including Delaware, Maryland, and New Jersey, where one of every 605 properties was engaged in the foreclosure process were been particularly affected. Certain cities including Chicago, Illinois, Houston, Texas, and Cleveland, Ohio, also saw marked increases in foreclosures during 2018.

Regardless of where you live or when you experience foreclosure, there’s no question that it is a difficult experience. The situation may seem hopeless, but you can recover from this type of financial emergency with some dedication and time.

Below, I’ve broken down surviving housing foreclosure, picking up the pieces, and moving on to future homeownership into five basic steps.

woman in living room sitting on carpeted floor in front of dark gray couch looking worried, distraught, afraid

How to Survive Foreclosure

  1. Evaluate Your Situation and Options

You will likely be subjected to a waiting period of some kind following foreclosure before property ownership is an option again. The typical waiting period is seven years. There are, however, circumstances under which this time period may be shorter—even as short as only two years—before you may be able to apply for a loan again.

Examples of circumstances that may reduce the wait to two years include the following:

  • Individuals who are handling bankruptcy.
  • Those dealing with short-sales.
  • Those addressing a pre-foreclosure.

FHA loans may be reapplied for after only three years. But the following extenuating circumstances reduce your wait time for an FHA loan by one more year:

  • Substantial loss of income. Losing your job is a good example.
  • Significant, major medical debt.

If more than one of these circumstances applies to you or you are otherwise unsure of your options, check with a trusted real estate attorney—or bankruptcy attorney if you are handling that process, as well.

  1. Build Healthier Financial Habits

Even when your loan money is flowing again, you will still have to come up with the funds to cover down payments, closing costs, and of course, the money to pay for help from the proper real estate and financial professionals. For most people who have experienced foreclosure, this will entail a close look at your spending habits.

Many of us have areas where we can trim some spending fat, or at the very least, save more effectively. Finding the best areas to cut down on expenses will require close scrutiny of your current spending habits and which “luxury” items you can live without or lower the costs on. Similarly, it may benefit you to set up automatic deposits into a savings account on a monthly basis so you don’t have to consciously think about it.

Squirrelling away any extra money you receive, whether it’s your tax return, a Christmas bonus, or a gift from your dear old Aunt Ida, can also be useful for both emergency planning and saving toward a new home.

  1. Begin Repairing Your Credit

Credit repair is possible, and it’s best to begin rebuilding your credit as quickly as you are able to. Foreclosures can do serious damage to your credit score, even if you have a lengthy history of good credit prior to the incident. The only way to get that credit back is the way you got it in the first place: step by step.

Fair Housing Act loans tend to require a minimum credit score of 580. Conventional lenders may have higher standards in the 640-650 range. Either way, it is likely that you will need to be consistent in your approach to repairing your credit.

closeup of tabletop with pile of fanned credit cards on wallet on cash

Making regular payments is the first major step you can take. Approach your highest interest payments first and work your way down. While you’re at it, keep any records of your typical rent and utility payments so that you can show you also are reliable on these fronts. You may have to wait up to two years to see a substantial improvement in your credit score, but with consistent positive action, it will come.

Although there are some tactics that will help everyone regardless of their credit score, it may be helpful to have an expert take a look at your situation. He or she may be aware of some tools that you didn’t know about. One credit expert we interviewed recommended paying down to approximately 15% of one’s balance monthly to build credit faster in certain situations.

  1. Resist the Siren’s Call of Predatory Lenders

Lenders with minimal qualifications may seem incredibly tempting during times of financial hardship. If you are struggling to make ends meet, it can be difficult to ignore offers of loans that would make your life more comfortable in the short-term—even if you know they are not in your best interest.

Whether a lender approaches you with instant approval for a payday loan or a “no money down” real estate offer, your response should be the same: be skeptical. Odds are high that the interest rates on such loans will be astronomical and overall not worth it in the long run. Any deal that sounds too good to be true most likely is.

Remember, part of what created the market crash in 2008 was too many loans going out to those who could not be reasonably expected to repay them.

  1. Reach Out for Help From the Appropriate Professionals

Housing counselors are one type of professional that may be helpful to you during this time. These professionals can connect you with resources and other professionals who can help you get back on the path to home ownership. Housing counselors may provide a range of services, including assisting you with making savings plans and rebuilding credit while acting as a liaison to other professionals who may be helpful to you.

Attorneys and CPAs may also be a valuable part of the process of getting your finances back into order. This process might include retirement planning and minimizing your tax liability—finding where you can save and which legal structures will offer you credit protection when you are ready to start investing again.