How Foreclosures Affect Your Credit Score
A foreclosure is damaging to your credit
A bank will foreclose on a home when the homeowner fails to make his mortgage payments and will initiate the foreclosure process when the owner has missed three monthly payments. A written letter is then sent out notifying the borrower that he is in default and has not fulfilled his mortgage obligations. If the borrower does not come up with the amount owed, the lender can sell the property at a public auction. A foreclosure can cause considerable damage to your credit history and decreases your credit report significantly. It will take you many years to restore your good credit.
Foreclosure lowers your credit score
A low credit score prevents you from getting favorable lower interest rates on any form of credit, including home and auto loans and credit cards. A borrower with a score below 600 can expect to receive mortgage interest rates that are several percentage points higher than someone with a score above 700. Lenders may even refuse to grant the borrower a mortgage at any interest rate.
Impact of foreclosure
The foreclosure procedure is usually preceded by late mortgage payments of up to 90 days, already reducing your credit score considerably. Predictably, the homeowner is probably also amiss at paying other bills due to his financial situation: he may also have collections or judgments against him. The foreclosure will reduce the homeowner’s credit report by about 100 to 150 points. The other late payments will damage the score even more.
A foreclosure remains for seven years
If you have had foreclosure proceedings filed against you, it will remain on your credit report for at least 7 years. After that, the foreclosure can only be removed from the report with a written request to do so to all the major credit reporting bureaus.
You can still buy a house
Homeowners are led to believe that once they have had a foreclosure they can never buy a home again. This is not true, as people can buy homes within a year of losing their foreclosed home. Higher interest rates will be imposed and a larger down payment might be required, sometimes as high as 20 percent. This is the time to turn to friends or family members for help if they are willing to be a second lien on the property.
Take care to re-establish your credit
Although most foreclosures stay on a homeowner’s credit report for seven years, it can stay on longer – up to 20 years – because it is part of the public record. Check carefully when you are trying to restore your good credit that the foreclosure has been removed.
Besides bankruptcy, a foreclosure lasts longer than any other item on your credit report. Re-establishing yourself as a good credit risk will take time and careful planning after a foreclosure.