The Impact Of A Foreclosure On Your Credit Report
There are few things more impactful to your financial health than a foreclosure. Aside from a bankruptcy, a property foreclosure is one of the worst things that can negatively affect your credit. Not only does it hurt your credit in the short term, but it has a lasting impact that could take years to recover. While it may seem like the only option now, there are alternatives to foreclosure that provide far less of a blow. It is essential that you know, and understand, all the options you have if you find yourself late on your mortgage. Never make a rash decision based on pressure or influence until you know exactly what you are getting into. Here are five reasons why you should always look for alternatives to foreclosure whenever possible.
- Mortgage Late On Credit Report: A foreclosure is the process of the lender assuming ownership of a property due to late mortgage payments. This starts once the homeowner is 120 days late on the mortgage. Depending on the state there are different practices and procedures involved. There are times when you will be advised to go into foreclosure so the lender can initiate a loan modification or loan restructure. Doing this is a dangerous game. For starters, when you go into foreclosure you are late on your mortgage. Every month you are late will negatively impact your credit score. Some lenders only look at your mortgage history when reviewing your application. If the modification doesn’t work you are left with three or more months of mortgage lates in addition to a foreclosure. Your score will plummet and you will be left with few options. It is not unrealistic to see a 100 point drop in your credit solely due to the mortgage lates.
- Long Term Credit Impact: A late mortgage payment can come out of left field. There can be a handful of unexpected liabilities, a sudden loss of income or an unforeseen emergency with the property. What typically happens is that one late payment leads to another and before you know it you are three months late. At that point, the lender may only accept payment in full to make the account current. Even if you find a way to pay shortly after foreclosure is filed, it is still a significant stain on your credit report. A stain that can last several years, impacting your ability for future ownership. Depending the type of loan you seek the waiting period can last anywhere from two to as long as seven years from the time of release. Even if your financial profile and assets have changed since the foreclosure, lenders will not budge on their guidelines. If you want to buy, you will be left with options that call for an increased down payment or higher interest rates. The only other option is to wait until the foreclosure waiting period has changed. At that point the market will be different and your interest in the property may not the same.
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- Impact On Credit Applications: Having a stain on your credit report doesn’t only impact you if you are looking to buy a house. It will be an issue every time you seek credit. Regardless if you are looking for a new phone or a new car, you will feel the impact. A lower credit score caused by a foreclosure could result in a higher payment for a new car, or potentially not being approved at all. Some landlords will run credit and have a minimum credit score requirement, regardless of the rest of the application. When you go into a foreclosure it is not just the property that is impacted. You will feel the effect months, even years, down the road when trying to apply for credit.
- Slow Recovery: Credit scores change every month for a variety of reasons. There are a handful of factors that go into how your score is calculated. The most important of these factors is timeliness of payments. You can check all the other boxes but if you have late payments your score will drop. Every late mortgage payment can lower your score anywhere from 40 to 100 points. This is only magnified with additional lates. You may have a score of 680 in June, but if you are late three straight months and go into foreclosure you can easily drop to a 550. As quickly as the drop is the recover is an uphill battle. It will take you a long time to climb out of the hole and see an improvement in your score. Generally speaking, it will take up to a year before you start to see much traction with your score after a foreclosure.
- Future Residence: Every landlord is a bit different in their application practices. Some will ask to pull credit, some will look for paystubs and some will have a detailed application. Almost every landlord will ask for the name and address of the previous landlord, or some previous address history. This section in generally accompanied by a reason for leaving. If you lie on the application you may forfeit your security deposit and if you tell the truth your application may be denied. Either way having a foreclosure on your record can be a difficult hurdle to overcome when you are looking for your next place to live.
Some things in life are simply unavoidable and must be dealt with. However, when it comes to a foreclosure you may have options that make more sense. A short sale is not a perfect option, but much better than a foreclosure. If you find yourself late you should always access your situation and know where you stand before doing anything.