Take Steps Now to Rebuild Your Credit

WASHINGTON — The ideal of homeownership may have lost its attraction to the millions of underwater owners who have lost their castles during the housing meltdown. But it is never too soon for folks who have given up their homes to start pointing to the day when they will once again take the plunge.

Whether you were able to persuade your lender to accept a payoff for less than what you owed and dump your albatross in what's known as a “short sale” or lost everything to foreclosure, if you start rebuilding your credit now, you may be able to buy another place in as little as two years.

Even if you've vowed never again to be an owner, the damage done to your credit profile by your housing woes will affect your everyday needs for at least the next 24 to 36 months. Everything from shopping for a cell phone to buying insurance to renting an apartment will be affected by your credit score because of bankruptcy or foreclosure notations in your file.

“We live in a credit-dominated society, making it especially critical for those with tarnished credit reports to begin the rebuilding process as soon as possible,” said Gail Cunningham, representative for the National Foundation for Credit Counseling in Silver Spring, Md.
It won't be easy, and it takes time, but “it is always worth the effort,” Cunningham said. “Time is on your side, and the farther away you move from your financial distress, the less impact it will have.”

Many of the steps you need to take to rehabilitate your profile are similar to those of anyone with tarnished credit. But it's likely that if you've been tagged by a short sale, foreclosure or bankruptcy, the rest of your credit has gone to seed as well.

So follow these tips:
-Review your credit report. You can't know where you are going until you know where you are. So get a free credit report at www.creditreport.com , and look it over for accuracy. (That's the official government Web site, and the only one that's truly free.)
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. “Paid late looks better than not paid at all,” Cunningham said.
Beware of credit-repair scams. Don't pay for something that you can do yourself. And by all means, don't pay someone to wipe away the negative items in your file. They can, simply by disputing the bad stuff. But if they don't follow through — and it's likely they won't — 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.
Don't assume that your short sale carries no further obligations. Some lenders are going after unpaid balances by filing deficiency judgments, while others are selling these bad debts for pennies on the dollar to bottom-feeding investors who then go after borrowers with a vengeance. Also, Uncle Sam can tax the difference as income.
If you are responsible for the remaining balance, make arrangements to repay, follow your repayment plan, and make sure that the lender, whoever it is, carries your account as current rather than seriously delinquent.
-Foreclosures and bankruptcies. Bankruptcies tend to have a greater impact on a credit score because they typically involve more than one account, whereas a foreclosure involves just your mortgage, said Craig Watts, public-affairs director at FICO, the company that devises many of the credit-score formulas used by most lenders. 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 will remain on your credit report for seven years (10 years for a Chapter 7 bankruptcy). But as these items age, says Watts, they will have less and less of an impact.
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, according to Ginny Ferguson of Heritage Valley Mortgage in Pleasanton, you will have to wait for five years after the bankruptcy is dissolved, not just filed — and seven years if you've filed for bankruptcy multiple times.
-Short sales. Lenders tend to look more kindly on applicants who have unloaded homes via a short sale, Ferguson said. In fact, she said you may be able to obtain another mortgage in as few as 24 months, depending on the circumstances of your previous derailment. “If you truly have extraordinary circumstances, you can be out there again as soon as two years.”
-Checking and savings accounts. If you don't have these already, open them. While activity on these accounts is not usually reported to the credit bureaus, your future mortgage lender will likely want to see two or three months of bank statements, so they count in your favor, especially if you are not overdrawn.
-Apply for credit. Chances are good that if you've gone through a rough time, your credit-card issuers have closed your accounts. But if you still have one or two or more, make sure that you make your payments on time.
-Next, apply for new cards. Credit-scoring models value the various types of credit differently, so the right mix is important. Having two or three revolving accounts, typically credit cards and an installment, fixed-pay loan (say, for a car) can actually 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. While secured cards sometimes have higher fees and interest rates, the account activity is reported to the credit repositories each month. And after a period of on-time payments, the issuer will often offer you an unsecured card.
Realize, however, that credit cards are loans, and each issuer has different lending standards. So you will want to apply only for those cards that fit your profile. To research the various yardsticks, go to www.CreditCards.com or www.Bankrate.com.
Beware, though, of applying for too much credit at one time because it can appear as though you are desperate. Too many credit inquiries can have a negative impact on your score.
Take out a small loan. A personal loan from a bank or credit union can serve to re-establish your credit. You may be asked to put up collateral, but it will be worth it to build your file back up.
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. If the credit agencies are unaware that you've cleaned up your act, all this effort will have gone for naught.