Many homeowners have been hit hard by a variety of circumstances that make it difficult to pay their mortgage. Sickness, job loss, a tough economy and other factors may prevent you from keeping up with payments, leading your lender to foreclose upon your home. In some cases, being free of a mortgage can be a wise move; however, foreclosure has a significant impact upon your credit rating. Here are some answers to some common questions about foreclosure and credit scores.
How does the foreclosure process work? If you miss a mortgage payment, you can expect to start receiving phone calls and notices from your lender with demands for payment. After a certain amount of time, the bank will initiate pre-foreclosure proceedings with a “notice to accelerate,” “notice of lis pendens” or other documents; the exact process varies by state. Eventually, the lender will file a foreclosure action to take title to your home. You may have a chance to redeem your mortgage and pay all amounts owed, but you lose all rights to your place if the lender is successful.
What happens to my credit score after a foreclosure? A foreclosure has a major impact on your credit score, possibly knocking your rating down 200-300 points. If that results in your score being 600 or lower, you may have difficulties in obtaining credit after the foreclosure case. In addition, some employers run credit checks as a condition of employment. You might find it hard to get a job.
When can I apply for credit after foreclosure? While it may not be as bad as bankruptcy, a foreclosure will be looked at as negative if you attempt to apply for credit immediately afterwards. You may be turned down entirely, or you may simply face higher interest rates and annual fees.
A foreclosure judgment will be removed from your credit score after seven years, so you can apply for credit cards and other credit accounts after that time. If you have no other significant negative credit history, your financial future after the seven year time period is improved. You should make timely payments on all debts to help boost your credit score going forward.
How long before I can buy another home? You can expect to wait about three to seven years after your foreclosure to be eligible to apply for another home loan. The exact circumstances depend on why you defaulted on the mortgage, your current credit score and the type of loan. If your inability to pay was due to certain economic hardships, medical condition or divorce, you may be looked at more favorably by a lender. You may start looking into applying for a loan or pre-approvals earlier than someone who had the money to pay, but simply walked away from the loan.
You probably have additional questions about how foreclosure will affect your credit rating and financial future; you might also wonder if there are other options available to you to avoid losing your home. Consulting with a mortgage equity specialist can help you through the process and determine whether there are ways to avoid foreclosure.