Finding a home after foreclosure
Despite the black marks foreclosures and short sales put on your credit report, in many cases, these financial catastrophes aren't preventing people from finding new housing.
In the last two years, tens of thousands of Minnesota homeowners have been through foreclosures or short sales, where homeowners sell their houses for less than what's owed. But in many cases, these financial catastrophes don't prevent people from finding new housing.
You've probably heard Kathleen Hollar's story a thousand times before. It's similar to many from the mortgage crisis. Until recently, Hollar lived in a 6-bedroom house in the suburbs with her two kids. The family bought it in 1989, around the time her husband died.
A couple years ago, Hollar, a substitute teacher and church organist, needed to free up some cash in order to finish school to become a special education instructor.
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Like so many others, Hollar used her house like a cash machine and refinanced.
A couple years after getting an adjustable rate mortgage, her payment jumped to $2,300, but her income didn't keep up.
"There was no way that I could be making $2,300 and then also keep paying for utilities and food," Hollar said."
She went into foreclosure. Hollar hasn't checked her credit score lately, but she saidd it was low even before the foreclosure. She's pretty sure it's now toast.
"From what I understand, I have no credit," she said.
"From what I understand, I have no credit."
Foreclosures and short sales can seriously dent a person's FICO score, which is one of the main tools lenders and landlords use to make lending decisions.
"What the formula is attempting to predict is the likelihood that someone is going to become really delinquent with some other creditor over the next few years," said Craig Watts, spokesman for Twin Cities company FICO, formerly known as the Fair Isaac Corporation.
Watts said foreclosures and short sales do about the same damage to a score. Both can indicate the homeowner is statistically less likely to repay future debts.
"A short sale is every bit as much of a failure to live up to the promises to the lender as a foreclosure, so from a statistical perspective, both of those events have similar impact when trying to predict a person's future repayment actions," Watts said.
So the initial score decrease will be the same -- experts say a ballpark of 100-200 points on a scale of 300 to 850.
The higher the credit score the greater the fall, Watts said.
And both events can remain on a credit report for up to 7 years, but short sales may be less damaging over time.
That's according to Cheryl Peterson, the mortgage foreclosure prevention manager at Twin Cities Habitat for Humanity. She said with short sales, homeowners are doing a couple things that can buffer the damage to their credit score. The houses might be sold before the owner gets too far behind on the mortgage.
"Then it's not going to as significant a negative rating on your credit," Peterson said.
For the lender, there's still a loss, but the bank doesn't get stuck with both an abandoned house and an unpaid mortgage as in a foreclosure. Peterson said that may look better to future lenders.
"When you're doing a short sale it's showing that you've actually done something about the foreclosure, versus if you're just getting foreclosed on," she said.
Peterson estimates that either way, the former homeowner might not be able to get a new mortgage for 5-10 years. But short sellers might get to that point first.
In the near term, Peterson said renting is a good way to rebuild a credit history. And even though landlords often scrutinize credit records, they do not seem extra wary of renters with short sales or foreclosures on their records-- despite their lower credit ratings.
"Our members do change with the market and allow for the tough economic times," said Tina Gassman of the Minnesota Multi-Housing Association, which represents landlords and property managers.
Gassman said landlords recognize short sales and foreclosures are becoming increasingly common. "Having something on your record isn't going to keep you from being able to rent," she said.
But because of the credit risk, such renters may be subject to more rental conditions, like paying cash, getting only a month to month lease, or having to put down multiple months of rent as a deposit.
That's what Kathleen Hollar did after her foreclosure, which also coincided with her bankruptcy filing. Despite those two major dings to her credit, she did manage to rent a house on St. Paul's east side.
"This house is about half to a third the size of what we had," Hollar said. "So it's very condensed."
That "condensing" has created a bit of a mess, with books and papers piled on tables and floors. Hollar said she needs to clean up, but her bad credit's a barrier there.
She said she tried to take out a new credit card the other day to buy a vacuum cleaner, but she was denied.
