The best way to get out of a foreclosure with the least impact to a credit score is for homeowners to keep up on all their other bills and installment payments and just let the mortgage fall behind. Having late mortgage payments and a foreclosure will drag down the score by quite a bit, but keeping the rest of the debt payments on time or paying off credit lines completely will help insulate the credit score as much as possible. It is when homeowners fall behind on all of their debts that they can experience scores under 500, which makes it virtually impossible to get any new loans.
Of course, the property owners should also consider some other options to stop foreclosure before the bank's lawsuit has gone all the through the local court system. If they can get the house of the the process before it has been auctioned off and the sheriff has been given the eviction order, then the homeowners will have fewer late payments on their credit history and may be able to show something else on the record besides a full foreclosure.
This is the time to consider using either a short sale or a deed in lieu of foreclosure before the owners run out of time for any solution. In either of these cases, they can end the foreclosure a little sooner than it would have it it went all the way to a sheriff sale and eviction by selling the house or giving the deed back to the bank. The most positive aspect of these options is that it keeps a couple of late mortgage payments off of the credit history and prevents the score from dropping even further.
Also, it would be a mistake for the homeowners to close out any credit lines right now that they might want to utilize in the future. If they can pay off excessive debt and get rid of the highest-interest credit cards, that would help their score and long-term financial condition. However, if they close out and pay off all of their credit lines, obtaining new borrowing after foreclosure will be extremely difficult and expensive. Unless the owners have decided to make due with a life not based on credit, it might be wise to keep at least one or two lines open in case of emergency and to begin the process of improving their credit score over time.
If the homeowners want to purchase a new home now before the foreclosure, then they need to make sure they buy an affordable house and do it as quickly as possible. It is important that they keep up on the current mortgage payment for as long as they can until the new purchase closes, as well, since a bank will not loan them more money for a new mortgage if they are already falling behind on their current housing payment.
Depending on the state foreclosure law where the property is located, the original lender may be able to come after the homeowners for a deficiency judgment after foreclosure and put a lien on the new home. However, this is somewhat rare, as most banks know that people in foreclosure have little assets or means to pay off another lawsuit or judgment after foreclosure. It would simply not be worth the bank's time or resources to begin another lawsuit when they have not had much success collecting on their previous foreclosure lawsuit.
Unfortunately, homeowners who lose a home to foreclosure will have to deal with a lower credit score for at least several years following the experience. Most of the techniques listed here are more for damage control and preventing a total collapse of their borrowing ability, rather than actually boosting the score or keeping it at the pre-foreclosure level. However, even if they are going to lose a house, it is possible to maintain some creditworthiness, which can assist former homeowners in beginning the process of financial recovery after foreclosure.