While many date the recent financial crisis from 2008, the reality is that there was a build up to that crisis. Prior to the events that took place in the fall of 2008, a mortgage market crisis was building in the form of increasing foreclosures. Many homebuyers discovered that they couldn’t afford their homes, due to resetting mortgage rates.
However, mortgage problems aren’t solely caused by resetting rates. Sometimes, especially in the current economy, unexpected financial problems can arise. When that happens, you might find that you can no longer afford your payment. Additionally, there are cases when a home has lost so much value that it doesn’t make sense to keep paying the mortgage.
Before you decide to give up, though, it’s important to understand how your credit will be affected if the foreclosure goes through.
Foreclosure and Your Payment History
The most important factor taken into consideration in any credit scoring model is payment history. Missed payments have the biggest impact on your credit score, and a foreclosure is the result of several missed payments, plus the fact that you have failed to pay on your obligation altogether. As a result, it’s going to have a big impact on your score.
It’s not uncommon for a foreclosure to drop your credit score by as much as 100 to 150 points. The better your score is now, the bigger the impact the foreclosure is likely to have. You will see declines before the foreclosure, from your missed payments, but once the process is complete, there will be another big drop. The total fallout from a foreclosure, from when you start missing payments to when the process is complete, can easily drop your score up to 200 points.
Foreclosure and Your Credit Report
A foreclosure is likely to remain on your credit report for at least seven years. After seven years, you can write to each of the major credit reporting agencies and ask them to remove it, but it’s still a matter of public record. As a result, it’s possible for a foreclosure to remain visible for up to 20 years. The only item that can remain on your credit report for longer than a foreclosure is a bankruptcy, so it’s important to keep that in mind before you go through with a foreclosure.
You will need to follow up with the credit agencies to make sure that everything is squared away after seven years.
Buying a Home in the Future
When you go through a foreclosure, you aren’t barred from buying a house for the seven years the foreclosure affects your credit score. In fact, if you work to improve your credit score, it’s possible for you buy a home within two or three years. You might need to write a letter of explanation for your lender’s records, though. This letter should describe the circumstances leading to the foreclosure, and the steps you are taking to prevent it happening again.
When you buy a home after a foreclosure, be prepared to pay a higher interest rate. Your mortgage rate might be as high as 10% if you are approved to buy a home soon after your foreclosure. This is the fallout, since lenders now view you as unreliable when it comes to paying off a home. If you want to improve your credit score, you will need to make all of your payments on time, reduce your debt in other areas, and work hard to re-establish your finances.
After a foreclosure, it can take a few years to battle back with your credit score. You might not get the best interest rates on loans for quite some time, and you need to be prepared for that.