How Does Foreclosure Affect Your Credit Score?

Foreclosures

The words home foreclosure is increasingly used in newspapers and articles. The crisis in 2008 caused a huge number of people to lose their homes after it was foreclosed. You may think that foreclosures are only a momentary setback. This is not the case. Foreclosures can signal the beginning of trouble by causing a significant dropping in credit score. This drop in credit score can hurt you in the future by leading to very high interest rates or make you undesirable to creditors.

How Does Foreclosure Affect your Credit Score?

What is a foreclosure?

Before we continue to talk about foreclosures, we must first understand what a foreclosure is. A foreclosure occurs when a borrower has a debt but is behind payments or cannot make the monthly payments anymore.  In a majority of states, a foreclosure can occur if the payment is 90 days late but in other states a foreclosure can occur as early as 30 days late. The lender is forced to attempt to recover the balance of the loan by selling the asset at a discount. This will help the lender retrieve some of the money back and prevent a total loss. The mortgage lender will be forced to get a termination contract that will force you out of the house and reprocess the property. A foreclosure is good for neither party as a result in a loss for the lender and the borrower loses his house and experiences a drop in credit score.

How does foreclosures affect your credit score?

Now the next question is how much does your credit score drop if you home experiences a foreclosure? An individual who is served a foreclosure notice and has a credit score of 680, the individual will experience a drop to around 420 or lower. This very large drop because of a score of 680 is considered a decent score but a score of 420 or below is unacceptable for any mortgage companies. Many mortgage companies will reject you if you have a score of 620 or below. The minimum average is 580-620 for mortgages companies to accept a person. Just the initial fees could be very large to even begin the loan process.  In the United States, a foreclosure can lower your score anywhere from 125 points to 175 points or more. The difference in interest rates could amount to tens of thousands of dollars in additional payments.

 How long does the foreclosure last?

A foreclosure will have a negative impact on your credit score for 7 years. The moment you receive a foreclosure notice, your credit score will be impacted the most. However, as time goes by, the impact will be less and your credit score will gradually improve. If you had good credit score before and have rarely been late in payments, a foreclosure can last as little as 2 years. The length of the impact will often depend on how timely your payments are after the incident. If you have good credit outstanding afterwards and make all future payments on time.

How can you avoid foreclosures?

Sometimes a foreclosure is not in your control and there is little you can do to prevent it from occurring. However a majority of the time, there are many steps that you can take to prevent a foreclosure from happening. By negotiating your interest rate and avoiding a fixed interest mortgage during the time when interest rates are high are two steps that can easily prevent a foreclosure. If you believe that interest rates are currently too high, the best thing to do is getting a floating interest rate rather than a fixed. Another factor is to never borrow more than you believe you can pay back. Purchasing a house with a small down payment and then attempting to pay the rest with a mortgage is often not a good idea. If you put down a larger down payment, the loan will be much smaller. By managing your monthly payments, you can easily avoid a foreclosure from ever occurring.

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