Losing your San Diego home can be devastating to your credit, not to mention your psyche, but you can buy again within as few as three years after a foreclosure or short sale.

It's not surprising when you lose your home you also lose some self-esteem, especially if your were raised in a culture that sees homeownership as a status symbol, as a sign that you've finally arrived.

Some lost self-esteem also comes from the belief you've lost your shot at the American Dream. Others will tell you seven to ten years must pass before you can buy again. At that time, uninformed people say, you'll have to buy at high interest rates.

That's not always true.

If you file for bankruptcy in San Diego, and make the right credit and financial moves, you can buy a home again as soon as two years after your bankruptcy is discharged.

What's more, if you rebuild your credit and maintain a healthy, on-time credit profile, you can take advantage of San Diego low down payment and low interest rate loans. The Federal Housing Administration (FHA) allows you to buy a home with as little as 3.5 percent down and take advantage of some of the best interest rates on the market.

FHA loans literally replaced the subprime brand, but came with federal backing.

You also may be eligible for San Diego first-time homebuyer programs that assist you with your down payment and closing costs. First-time homebuyer programs are not just for those who have never owned a home, but allow you to qualify if you have not owned a home in the past three years.

Some private lenders, San Diego home owners and investors also may allow you to buy a home even sooner than the two- to three-year period, but it will cost you a higher interest rate and require a large down payment.

With the housing market flat in San Diego and many local markets still expected to see prices fall more, it is not a bad idea to spend the next several years cleaning up and re-establishing your credit. Good credit will allow you to buy a home with a minimal down payment and the lowest interest rates.

If you lost your home to foreclosure or a short sale, don't lose hope. Don't hesitate. Begin today putting yourself in a good position to buy.

Fix your credit

• Rebuild your credit by making your monthly debt payments on time. Don't ignore your remaining credit obligations during foreclosure or after losing your home. Your credit score gets a boost, in part, based on the number of positive accounts in your credit report. The more you have, within reason, the faster your credit score rises, even after losing a home.

• Pay down your credit cards but not to a zero balance. Your credit score gets a boost if you maintain a balance that is about 30 percent or lower than your credit limit. Keeping a balance reveals you can borrow money and pay it back on time. Don't close out your credit cards because the longer your positive credit history, the more your credit score and your ability to buy a home will improve.

Save money

• Most of today's homebuyer programs require a down payment. FHA loans require 3.5 percent down -- $3,500 for every $100,000 you borrow. You likely will have to pay closing costs, another 2 percent to 3 percent of the sales price. This is another $2,000 to $3,000 per $100,000. Do the math to determine how much you need to save each month, over the next two or three years, to have enough to cover your down payment and closing costs.

Don't be pressured

• Buy only when you are ready. You didn't lose your credit overnight. Likewise, it will take time to rebuild your credit and save for a down payment. Home buying deals will be available for years to come.

• Avoid adjustable rate mortgages (ARMs) and consider a 15- or 30-year fixed rate mortgage (FRM) that is a fully amortized loan so your payment and interest rate are fixed for the duration of the loan. Full amortization means each payment helps pay down the principal. When your loan term ends, so does the loan balance.

• Buy based on what you can afford, rather than a higher amount approved by the lender. You already know the risk of biting off more than you can chew. Lenders will pre-approve you based on your gross monthly income, but that does not consider taxes subtracted from your paycheck, food, clothing, utilities and other monthly obligations.

Know your comfort zone. Don't over-extend yourself.

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1. Do Nothing – If a homeowner does nothing, they most likely will lose their home at foreclosure auction. Loan applications generally ask if the applicant has ever been foreclosed upon. Credit reports also disclose this damaging information. Not the best option.

2. Payoff/Refinance – Completely paying off the entire loan amount plus any default amount and fees. Usually this is accomplished through a refinance of the debt. New debt is at a normally higher interest rate and there may be a prepayment penalty because of the recent default. With this option, there should be equity in the home.

3. Reinstatement – Paying the entire default amount plus interest, attorney fees, late fees, taxes, missed payments and fees.

4. Loan Modification – Utilizing the existing mortgage company to refinance the debt or extend the terms of the loan. This may allow the homeowner to catch up at a more affordable level. To qualify, you must prove to the lender you have fixed the problem that caused the late payment.

5. Forbearance – Lender may be able to arrange a repayment plan based on the homeowner’s financial situation. The lender may even be able to provide a temporary payment reduction or suspension of payments. Information will be required from the lender to show that you are able to meet the new payment plan requirements.

6. Partial Claim – A loan from the lender for a 2nd loan to include back payments, costs and fees.

7. Deed in Lieu of Foreclosure – Give the property back to the bank instead of the bank foreclosing. Banks generally require the home be well maintained, all mortgage payment and taxes must be current. Most loan applications ask if this has ever happened.

8. Bankruptcy – This option can liquidate debt and/or allow more time. I can refer you to a qualified bankruptcy attorney.

* Chapter 7 (Liquidation) To completely settle personal debt.
* Chapter 13 (Wage Earner Plan) Payments are made toward a plan to pay off debts in 3-5 years.
* Chapter 11 (Business Reorganization) A business debt solution.

9. Sale – If the property has equity (money left over after all loans and monetary encumbrances are paid). The homeowner may sell the home without lender approval through a conventional home sale. In this case, the homeowner will get cash from the sale. On the other hand, a Short Sale, also known as a pre-foreclosure sale, can be negotiated with your lender by your Real Estate Professional if what is owed is MORE than the property’s value.

Contact us to discuss ALL your options.

The rate of bankruptcies is down considerably from a year ago, but a recent surge in the cases indicates some people still need this complicated form of relief from indebtedness, especially those suffering from foreclosure or other housing-related forms of financial distress.

Bankruptcy filings in June, 120,000 were up from 115,000 in May this year, and the unusual seasonal jump month-to-month puts the rate of bankruptcy filings at a 10 percent increase on a seasonally-adjusted basis.

Filings this year were still down 5 percent from a year ago and for the first half of the year filings are down 8 percent compared to the first half of the year last year.

Perhaps the seasonally-adjusted basis indicates a short term surge, given the number of filings has been steadily decreasing this year, month-to-month since March, according to the center.

Is bankruptcy for you?

You might consider bankruptcy if you truly cannot pay your bills and want to free yourself of some debt now so you can begin with a clean slate for the future.

If you qualify for bankruptcy, the court will discharge or cancel many of your debts or allow you to pay a reduced amount.  After bankruptcy, many of your creditors can't come after you for any unpaid amounts.

Filing for bankruptcy is complicated. You should hire a bankruptcy attorney to represent you.

You have two bankruptcy choices.

Chapter 7 is a two- to three-month process of liquidation in which all but your exempt property (necessities like your home, car, land, pensions, retirement accounts, etc. ) is sold to pay your debts. Once your property is sold and debts paid, certain remaining debts, but not all, are discharged. For any exempt property you keep that's secured by a loan, you must still pay that debt if you want to keep what's securing the debt. Chapter 7 remains on your credit report for 10 years, but that doesn't necessarily mean you can't acquire credit. It won't be easy and you'll pay more than those without a bankruptcy on their credit report.

Chapter 13 is a three- to five-year process that allows you to retain possession of your property if you commit to a court-supervised plan to pay a portion of your debts. Later, some debts not paid in the plan could be discharged. The amount you must pay creditors varies based on your financial circumstances. You can use Chapter 13 to stop a foreclosure and include the home mortgage in your payment plan. Chapter 13 stays on your credit report for 7 years.

Only debts owed and listed with your bankruptcy case, but not debts you acquire after bankruptcy, can be discharged. You will also continue to owe some secured debts, income and property taxes, child support, alimony, government finds, restitution that's part of a criminal sentence, student loans and debts incurred through fraud, including credit card use, immediately before you file for bankruptcy.

Secured debt are those obtained with collateral and, perhaps, a lien placed on the collateral. Mortgage and car loan are secured debts. Credit cards, signature installment loans are examples of unsecured debt, unless the creditor sues to collect and wins a judgment.

You can't just walk into bankruptcy court and file, you must first qualify.

To file Chapter 7 you'll have to take a "means test" to determine your ability to pay creditors. If the test reveals your income is above the median income for your state, you can't file Chapter 7, but can convert your case to Chapter 13. With income at or below the median income you can be permitted to file for Chapter 7.

Other qualifying rules are complicated and require the assistance of a bankruptcy attorney.

A bankruptcy can help in a variety of ways.

During the qualifying process, 180 days before you file for bankruptcy you must get credit counseling from a government-approved organization. You must also complete a debtor education course before your debts are discharged. Among a host of topics, the lessons include budget development, money management, financial planning, the wise use of credit.

During the process you'll also run an analysis of your financial condition and learn what caused your financial condition, alternatives to bankruptcy, how you can develop a plan for future hardship.

Alternatives to bankruptcy can surface during the qualifying process.

In addition to discharging your debts or creating a less stressful repayment plan, and learning how to better manage debt, the moment you file for bankruptcy, many creditors must beg off and leave you and your property alone and stop all collection efforts including court suits at least until your case is resolved.

Contact us for more information.