How can a Foreclosure Impact Your Credit Report
It’s possible to keep it on your record for seven years. However, it is possible to get better sooner.
A foreclosure could tarnish the credit score for seven years after the date of the first payment you missed. In that time, it could impact your credit score and how other lenders evaluate how creditworthy you are in the coming years.
If you’re having difficulty with your mortgage, It’s crucial to know the foreclosure process, ways to avoid it, and the steps you can do to recoup in the event of it happening.
What is the cause of foreclosure?
Foreclosure occurs when you are in a way that you are unable to make payment of the mortgage that the lender takes possession of the property to pay for the amount you owe.
In general, the process of legal foreclosure will not begin until you’ve been in default with your payment for 120 days. After that, the length of time to finish the procedure could differ based on the firm that manages your loan and the location in which you reside.
“Foreclosure is typically the last resort for lenders when the consumer hasn’t paid the loan payment,” says Amy Thomann, who is the director of education for consumers at TransUnion.
The exact process and foreclosure laws may differ from state to state; however, generally speaking, the mortgage lender will have two alternatives:
- Judicial foreclosure. In this case, the lender is required to bring a civil suit in a courtroom, which permits an individual borrowers the right to protect themself.
- Nonjudicial foreclosure. This type of foreclosure allows lenders to foreclose with no involvement from a court and instead follow the steps laid out in the powers of sale provision within the mortgage document or trust deed.
The mortgage company is obliged to inform you of the process. Therefore, it shouldn’t be a shock. However, if you’re having difficulty paying your bills on time, It’s best to take care of the issue before it gets to this moment.
How a Foreclosure can Hurt Your Credit
After it’s been triggered mark, a foreclosure will stay in your credit file for seven years following the date of the first late payment. Then, it will be deleted from your credit report.
It’s difficult to determine precisely the amount of points a foreclosure will affect your credit score since various other variables are taken into consideration when calculating the 3-digit number.
In the end, your credit history is the most significant aspect of the calculation of your FICO score, which makes up 35% of its total.
Foreclosure “is the final and most significant step following several missed installments,” says Thomann, “so it’s likely to result in a significant negative impact on your credit rating.”
Additionally, you’ll be stung by the unpaid bills that led to foreclosure, which will increase the negative impact.
In the end, the foreclosure process can make it harder to obtain loans shortly. But it doesn’t eliminate the possibility. Some loans are subprime for those who have negative marks on their credit report.
Be aware that the interest rates for these loans are usually extremely high, increasing your monthly payment and the total amount of interest charged.
There is also a minimal waiting time following foreclosure for all kinds of mortgages.
- A conventional home mortgage: 7 years
- U.S. Department of Agriculture or Federal Housing Administration loan: Three years
- Department of Veterans Affairs loan: two years
Suppose you can show that the foreclosure occurred due to a qualifying circumstance, for example, medical or unemployment. In that case, the waiting time can be reduced to 3 months for traditional loans and an additional year with USDA and FHA loans. It could be some time before you be able to be a homeowner once again.
You can stay out of foreclosure by executing the short sale, which permits the homeowner to sell their home at a lower price than the amount you owe.
You can also get the deed in place of foreclosure, in which you agree to surrender your property to the lending institution.
While these options keep the foreclosure off your credit history and reduce the time it takes before you can obtain an additional mortgage, don’t think you can save your credit rating by selecting the latter option.
“There is no distinction in the impact on the credit score since they all indicate an unpaid loan,” says Thomann.
How to Avoid Foreclosure Damage
The damage to your credit caused by foreclosure begins when you make your first payment. If you’re having trouble keeping up with your mortgage, it’s crucial to take action early to avoid the issue.
If you suspect you’re likely to be having trouble making a payment, you should reach the lender. “In some instances, the lender will actively reach out to the borrowers to contact you to find out what’s wrong,” says Leo Loomie, the senior vice president of Digital Risk. This company provides risk, compliance, and technical assistance to mortgage companies.
If your phone or your lender contacts your phone, tell them why you’ll not be able to pay, explain your expenses and income, and determine how long you believe this issue will be.
It’s in the best interest of the lender to ensure you keep your loan. You might be able to reduce or even stop payment with forbearance or refinance to an affordable amount with modifications to your loan.
“There are lots of options to consider changing the terms to benefit the borrower and help them get up and running,” says Loomie.
A forbearance or any other workout program can help safeguard your credit score by allowing you to avoid late payments and the repercussions of foreclosure.
It’s recommended to talk with a reputable housing counselor who could help you avoid foreclosure and identify any special assistance programs you might be eligible for. Beware of frauds and stay clear of companies that claim to help you save your home for a cost or offer promises that aren’t realistic.
Recovering from foreclosure
If you’re not able to prevent foreclosure from occurring, then it, along with the late payments, could lower your score right away.
Fortunately, however, it is indeed possible to improve your FICO score favors new information over the old. So, while foreclosures will remain in your credit file for seven years, it’s possible to minimize the negative impact in the future by implementing positive credit behavior. Here are some strategies to improve the credit rating over time.
Check out your financial situation. The likelihood of foreclosure isn’t always the result of economic insanity. If you’ve lost your job or accrued substantial medical bills, it could be challenging to figure out how to get out.
However, if you’ve made a mistake during your journey, look at your financial situation from a holistic perspective and holistically, suggests Loomie. “Look at your expenditures and the areas you could sacrifice to get back on foot with your finances,” he adds.
Make sure you address any other items on your credit report that are negative. If you have any other accounts in arrears or are in collections, you should get to a point as fast as possible. Also, look over the credit reports to confirm that the information you have provided is correct.
If you discover an error in the data, You can submit a dispute to your credit report agencies to get the entry removed, possibly improving you improve your score on credit.
Be punctual with your payments. Remember, your payments history will be the most significant element in improving your FICO score, therefore making sure that you pay your other debts punctually is crucial for your future success.
If it’s credit cards or auto loans, or student loans, you can set up automatic payments. Prioritize those monthly payments to build an excellent payment history moving forward.
Lower your credit card balances. If you own credit cards and have a balance, keeping it to a minimum each month will help boost your score on credit. Some experts suggest maintaining your credit utilization – your amount divided by less than a 30 percent credit limit. The lower it is, the more favorable.
Suppose you don’t have any balances each month. In that case, you may reduce the amount of credit you use by making several payments during the month or finding out the date your card issuer will report your transactions and then making the payment a few days before.
If you’re carrying a huge balance that is too expensive to pay right now, you might want to consider a credit card to transfer balances to remove interest from this equation for a short period of time. You can also consider a debt consolidation loan that will lower the ratio on your card and reduce your usage to a minimum.
Avoid accumulating debt. Although borrowing money will not affect the credit rating in a significant way, it could make it hard to make other debt repayments. In the event of this, you may find yourself back in the same spot you began with unpaid payments and negative marks on your score.
If you’re thinking of opening credit cards or obtaining an installment loan, take a look at your options and determine if you’re able to get the information you require in a different option.
Be patient. Foreclosures are a significant credit risk, so don’t think you’ll see a complete recovery in a matter of hours. If you’re patient and persistent, you’ll witness positive and long-lasting improvements.
“It requires time and effort to build your credit score, and the negative effect a foreclosure can affect your credit score will generally diminish in time,” says Thomann.