How I lost my house, destroyed my credit and rebuilt over time.

At the top of my market in 2006 at the ripe age of 24 I purchased my first home for 175k. During that same time I had also cosigned on a private student loan for my then girlfriend. At the time seemed like a good idea and she continued paying on the loan as far as I knew.

For the most part the house seemed to be in pretty good shape.The home inspector didn’t find any red flags and neither did I on my inspection.  About a month into it my garage door completely fell off the track and broke in pieces.  A few weeks later went the air conditioning and 4 months after that was the furnace.  All in all I was about 10k extra into the house the first year of owning it. I also decided to do a kitchen remodel and spent about 4k on cabinets, flooring and counter tops.

Things seemed to be going well with the house and I was getting by with the payments but it was getting tougher to keep going.  More things started breaking and costs started piling up.  I maxed out my credit card and got behind on payments.I contacted my lender to try and work out some type of payment plan but they refused.  I tried refinancing and short sale, but that failed too.  I was lost.

Meanwhile I noticed the neighborhood wasn’t as great as I thought.  There was a drug dealer that wandered the streets at all hours of the day.  Drag racing occurred right in front of my house. Yes you read that right.  2 cars lined up side by side and speeding down the road over 100mph.  The cops unfortunately weren’t much help until one day a kid hit a telephone pole going 100mph+ and died.  It was all over the news later that day.

The market crashed hard in my area and my house value went way down. I lost my house to foreclosure shortly after.  In the meantime I tried getting into rentals but no one would take me as my score dropped like a rock. My credit score was terrible and I had no money for a deposit.

With nowhere else to go I was forced to move back home with my dad.  He agreed I could stay there for a few years until I could get back on my feet again.  All of my savings was completely exhausted on the house.  Then I started to have major issues with my car.  It took borrowing more money from family to get that fixed.

It wasn’t until spring of the following year that I really understood the consequences of having a foreclosure and a student loan I cosigned for in default.

I started car shopping.  I went to one dealership and was told they couldn’t loan me more than 8k for a car but at an extremely high rate of 15%. The same thing happened at another dealer.  I went to the dealership in my home town and the exact words of the salesman were I would not be able to get a car loan not even with a cosigner.  My dad stepped in and put the car loan in his name.  Meanwhile I made all the payments on time. It was good for my dad but did nothing to help my credit. I only had one credit card which I did use occasionally and had about 50% or more of my available credit used up at all times.

It took me about 3 years to pay down all my debts including the payoff on the car. Within that time I was also able to save up almost 8k as a reserve fund just in case.

Finding someone to rent to me was again a challenge. Finally I found a place that gave me a 2nd chance.

The caveat was that I had to prepay 6 months’ rent, first months rent and a deposit before moving in.  They would in turn hold onto both the prepaid rent and deposit until the end of my lease just in case.  I was a huge risk having a foreclosure and low credit score. I really am so thankful they were able to help me out.

What went wrong?

I over extended myself and bought a bigger house then I could afford.

I didn't get a 2nd set of eyes on the house before purchasing it to see what things needed replacing in the future.

The neighborhood looked great in the pictures and in person, but at night it was borderline C- D neighborhood.  Hearing gunshots at night was common.  Driving by you would have never known that.  The neighbors were all usually outside working on their yards or enjoying the back yard.  The houses all had great curb appeal as well.

I blew my budget every month on non essential things like going out to eat or entertainment and I didn’t stick to my budget.

I had no backup plan in case I couldn’t pay my mortgage.  It was certainly possible I could have rented out my house and still made the payments.  But I gave up without giving that a chance.

Having no money in savings hit me the hardest. Every time I got caught up on bills something else came up.  If I had saved up a few thousand all the stress and financial hardship would have never occurred.

I really wish I would have found biggerpockets back then.

What did I do to rebuild my credit?

Pulled my credit report

Sitting down and talking to a banker. He gave me some great free advice and we went over each item on my credit report. It turns out because I only had 1 line of credit open my score was rebounding slowly. He recommended at least 3 lines of credit. ( student loan, car loan, credit card, etc) He encouraged me to apply for a credit card through the bank and I was approved. I had several 30 day lates as well.

Focused on the negative items and tried to eliminate those one at a time

I paid down my credit card balance and charged only gas or groceries every month.

Next I continued to pay my bills on time each and every month.  Those late payments were now a thing of the past.

When I started this journey my score was 760.  After foreclosure and the the student loan went in default I dropped below 500.

Now I am on track to hit 700 later this year!

Don’t let anyone ever tell you your score can’t rebound after disaster.  Anything is certainly possible.  Many people told me I was done and would likely never be able to get a car loan or house ever again.  You have to take the initiative.  Don't listen to the negative comments, focus on getting on the right path.

Last year after saving up some money for a down payment I bought my first car in my own name at just under 5%.  It felt great to be approved.  I am now on track to pay off my 6 year loan next year.

If there is interest I will write another blog post in more detail about rebuilding credit.