Dear Credit Care,

I lost my house to foreclosure due to a drop in income. I have paid all my other bills, but my credit score is 645. What can I do to raise my score? And how long do I have to wait before I can buy a house again? I have no credit card debt or car loan and no other debts. 

-Silvia

Dear Silvia,

From your letter, it sounds as if you have paid all accounts with outstanding balances and your credit score has just not had time to recover from your foreclosure. Let's go through some ways you might improve your score, and then we'll discuss shopping for a mortgage.

Time and positive information is what you need to improve your credit score. Begin using old credit card accounts again for purchases that you have a plan in place to pay off each month. The new positive payment history on the old accounts will help increase your credit score.

Also, if you do not currently have an installment loan, you might consider opening one. Having a variety of accounts on your credit report is one of the factors incorporated into your credit score. Be extremely cautious about this step, however. After a foreclosure, the last thing you need is debt that you can't handle, so of course, only open an installment account if you know for sure that can afford the monthly payment. If you do think you could handle the loan, a passbook savings loan or personal loan from your bank might be a good fit for you. Just be sure that your on-time payments on the loan are reported to the three major credit bureaus.

Based on your credit score of 645 alone, the national rate for a 30-year fixed-rate mortgage stood at 5.16%, as of Friday, June 10, according to daily-updated rates found at myFICO.com. For a $216,000 mortgage, that would mean a monthly payment of $1,180. To give you an idea of what you would pay with a higher credit score, the national rate for a credit score of 700 for the same mortgage is 4.33% and a monthly payment of $1,073. The higher credit score provides a savings of $107 a month, or $1,284 a year. To see where your score fits in, check out the national interest rates based on credit scores at myFICO.com.

However, your credit score is not the only factor a lender will review. Your credit report will be reviewed, and the foreclosure will understandably raise a red flag for lenders. Depending on how much time has passed since the foreclosure, you may not qualify for a loan from Fannie Mae or the Federal Housing Administration (FHA). The current rules require a three-year wait after a foreclosure for an FHA loan and a seven-year wait for a Fannie Mae loan. Or if you meet the requirements for an extenuating circumstance (loss of job, a divorce or unexpected medical expenses) that contributed to the foreclosure, you may qualify for a Fannie Mae loan just three years after a foreclosure.

Due to the foreclosure, some lenders may also require a higher down payment on a mortgage loan. So, while you are rebuilding your credit and improving your credit score, save for a down payment on your next loan.

My recommendation is to work on improving your credit score and begin shopping for a mortgage loan after you have saved for the down payment and your credit score has reached the point that you know you can afford the interest rate for the loan.

Handle your credit with care!

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