“The key is to avoid the foreclosure. That is what will help you be eligible for the shorter period.” Andrew Wilson – Fannie Mae

Clean credit is critical in our society. Bad credit can impact all dimensions of one’s life including making it more expensive to rent or not being able to rent what you want– at all. In many fields, especially financial services, military, and law enforcement, it can make it difficult to find or even keep a job.

How quickly your credit score improves depends in part on how the problem is reported. In a Short Sale where the balance is forgiven and no deficiency is recorded in public records, recovery can be quick. Simply paying all your debts on time could bring your score up to a reasonable range in nine months. This may not qualify you for a mortgage, but it will help in other situations.

In sharp contrast, a foreclosure or bankruptcy can weigh you down for years. FICO has found that it takes a borrower who has gone through a foreclosure or bankruptcy 7 years to climb back to a near-perfect 780 score. If someone has gone through foreclosure and still needs to file bankruptcy, the result can be catastrophic. And bankruptcy does not wipe out all debt. There is certain debt that cannot be discharged in bankruptcy.

Fannie Mae, Freddie Mac and FHA have guidelines for how long a borrower must wait to get another mortgage after a “significant derogatory event.” There are plenty of conditions, but clearly the wait is longest after a foreclosure. Extenuating circumstances like a job loss, illness or divorce may reduce the wait. Without extenuating circumstances, waits can extend to seven years after foreclosure.

“The key is to avoid the foreclosure,” said Andrew Wilson, a spokesman for Fannie Mae. “That is what will help you be eligible for the shorter period.”