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How foreclosure affects your credit score

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 24th May, 2006 07:15am
When you fail to pay back the mortgage and you're not offered a workout plan to continue payments, chances are that the property may be foreclosed. Foreclosure involves the lender taking away your property and selling it off at an auction in order to recover the unpaid mortgage debt.

However, if the market isn't good enough and the sale price comes out to be lower than the balance you owe, then you may have to pay the deficiency (difference between the sale price and what you owe).

How does foreclosure affect credit?


When it comes to foreclosure, most people are concerned about how foreclosure affects on credit rating. This is because until and unless one is able to rebuild credit after foreclosure, he will not be able to get credit/loans at better rates of interest. If the financial markets are not good enough, one may not even be approved for any type of credit or mortgage.

Moreover, if your credit isn't good, you won't be able to secure a job in case you're looking for a new one. Therefore, prior to a foreclosure, you should be aware of how foreclosure affects your credit score.

Foreclosure affects your credit score by 250 points. That is, if you have a credit score of 680, it will drop down to 430. So, it's better to avoid a foreclosure and request the lender for a loss mitigation plan so that you're able to keep the home or if at all you can't keep the home, then at least see that your credit doesn't get a big hit.

Foreclosure: How long will it affect credit?


Like any other negative item, a foreclosure stays on your credit report for 7 years. However, foreclosure affects your credit score predominantly for the first 2 years. But, once you start rebuilding your credit, it gets better with time, though it'll take almost 2-4 years to get a mortgage after foreclosure, that too at comparatively better rates of interest.

How can you repair credit after foreclosure?


Here are 3 tips to help you repair credit after foreclosure.
  • Prepare a budget: Look at the way you spend your money. Plan a budget and try to follow it. Understand why your home was foreclosed. If there's anything that you could have avoided, try to fix it now. Track if you are spending extra and adjust your budget accordingly. Use the Simple Budgeting tool and prepare a well-planned budget.


  • Pay your bills on time: Keep paying your bills and debts in time and make sure your creditors report them to the credit bureaus. If required, take help of a credit counselor or avail debt management plan in order to reduce your debt burden. This is because high debt load will affect your credit score and bring it down. Don't ignore small expenses as otherwise they can be sent for collections.


  • Get a credit card: You can apply for credit cards and use it to make small purchases. But pay off the balance in full every month. This will reflect that you can manage credit responsibly thereby borrowing only what you can afford and paying it back in time. However, go for a credit card only if you have adjusted your expenses.
Even if foreclosure affects on credit rating, you can manage your finances wisely and rebuild credit after foreclosure. All you need is to stick to your budget, make debt payments in time and avoid overspending.
Posted on: 24th May, 2006 07:15 am
If you were quit claimed on to a property and are not on the loan. If the property get foreclosed on will this effect your credit? Will a forecoseure show up on your credit report? And how do you find out if the other person on the title who does carry the loan has missed payments and may be near a default?
hi alex,

welcome to mortgagefit discussion board.

if it is becoming hard for you to continue the payments then talk with your lender about any forbearance plan under which your payments can be stopped for few months to help you recover from financial problems you are facing and then continue the payments.

another way your mortgage can be saved from going into foreclosure is to set up a repayment plan in which your loan term can be extended so that you can afford the payments.

these are known as loss mitigation plans which are used to save borrower from having to face foreclosure. if these plans do not work then you may have to give up the house using a deed in lieu of foreclosure where the lender accepts the house in return to whatever balance is left on the mortgage.

a deed in lieu if accepted would be better than foreclosure as then lender would not be going for deficiency judgment. while in foreclosure lender can get a deficiency judgment against the borrower and place a lien on his other assets for recovery of his balance dues.

foreclosure as well as deed in lieu of foreclosure will have bad impact on your credit and you will face difficulty in availing debt in future. so these two choices are to be explored at the last when other plans don't work.

if you are still current on the loan then try to find out if the loan can be refinanced or not and how much equity (if any) is there in your house. it will be useful in determining if refinance would be possible or not.

do let me know if you have any other questions.

thanks
blue
Posted on: 09th Jul, 2007 01:23 pm
Posted on: 10th Jul, 2007 12:31 am
hello, my situation is slightly different and very confusing. I am a joint applicant on a home with my mother who has been consistantly delinquent on payments. I have a family of my own and live in a totally different state as her and can not afford to pay for her mortgage as well as a home for my family. i was wondering how foreclosure affects your credit and all the details on it, since working out any kind of payment plan or sale on the home with her hasn't proved useful (she declines all suggestions) I just wanted to know if the lender forecloses the home, then do I have to eventually pay back the remaining debt on the house in the future? How long does foreclosure stay on my credit? Most websites are only telling me how to avoid forclosure, rather than providing me the repurcussions of it.
Posted on: 26th Jul, 2007 10:50 am
Hi Tris,

As you are a co-borrower your credit will also be affected along with her.

"since working out any kind of payment plan or sale on the home with her hasn't proved useful (she declines all suggestions)"

You should try and explain to her that her credit will get affected if lender selects to foreclosure. And will face problems in getting new loans. I

" I just wanted to know if the lender forecloses the home, then do I have to eventually pay back the remaining debt on the house in the future? "

It depends on your state laws. In some states deficiency judgment is allowed while in some it is not. If you are in a state which allows for deficiency judgments then lender can place a lien on your other property for recovery of his remaining debt.

Miller
Posted on: 26th Jul, 2007 02:18 pm
"How long does foreclosure stay on my credit? Most websites are only telling me how to avoid forclosure, rather than providing me the repurcussions of it."

Foreclosure will remain on your report for 7 years.

Foreclosure will not be good to have on your report. Make concerned effort so that foreclosure can be avoided. Why is she not listening to any kind of suggestions from you? It is likely that she is not aware of the negatives affects of foreclosure, I think proper explanation will do the trick.
Posted on: 26th Jul, 2007 02:36 pm
My taxed increased by $3,000.00within two years of my home purchase, it is presently $12,000.00+. Between taxes, mortgage and car insurance I can barely make payments. I am ready to run...
What are my options???
Posted on: 09th Sep, 2007 05:32 pm
along with hike in taxes, many properties in my area are up for sale and my house was appraised for less than my loan amount...
Posted on: 09th Sep, 2007 05:41 pm
Hi Guest,

Don't get so much frustrated as everybody have to face some difficult situation in the course of their life. Even if your home appraised value has become less than your outstanding loan balance, you can try to sell it out and cover the payments. If required, you can take the fund from your other personal savings.

But I think in your situation, it will be better if you consult with a tax professional so that he can help you reduce the taxes.
Posted on: 10th Sep, 2007 01:19 am
"My taxed increased by $3,000.00within two years of my home purchase, it is presently $12,000.00+. Between taxes, mortgage and car insurance I can barely make payments. I am ready to run...
What are my options???"
You should look at cutting on some expenses to save money for the payments.

How much is the difference between the current house price and balance on mortgage? If it is not too big then sell the house and pay for the deficit from personal savings.

Miller
Posted on: 10th Sep, 2007 12:02 pm
i am in partnership with an idiot i am able to make my share of mortgage payment but my partner is broke how will my credit effected if we go for an foreclosure this is a llc also how would i keep track of his payments
Posted on: 12th Sep, 2007 08:47 am
Hi Casey,

Your credit will be affected as you are also on the loan. And I would also say that it is always better to avoid foreclosure if possible. You need to look at other option available for you instead of foreclosure.

You need to know if your partner is in a position to pay his share of the mortgage or not. If he cannot continue the payments and it becomes difficult for you to continue the loan on your own then you will have to look into alternatives before the loan is in default.
Posted on: 12th Sep, 2007 12:12 pm
"how would i keep track of his payments"

You can make an agreement with your partner that you will be making the mortgage payments & he should give his share of the payments over to you. And then you will pay the mortgage company.
Posted on: 12th Sep, 2007 06:43 pm
hi casey,

foreclosure will certainly have a negative impact on your credit as you are also on the mortgage. it is better to avoid foreclosure and in this situation, if you alone can afford to make the payments, then you should refinance by taking a new loan in your name solely. but before refinancing, you must check out if there is any prepayment penalty or not. in case if there is the penalty, you may have to incur some costs.

if you wish, you may also sell the house to cover the payments. and if your partner does not agree to sell, you may file a partition lawsuit in the court.
Posted on: 12th Sep, 2007 10:04 pm
MY HUSBAND AND I ARE ABOUT TO FORCLOSE ON OUR HOUSE IM ON THE TITLE BUT NOT THE LOAN WILL THIS HURT MY CREDIT SEEMS HOW WE ARE MARRIED
Posted on: 17th Oct, 2007 03:23 pm
This is a great site and I have gotten some helpful insight. Thanks. I just wanted to get clarification about this: I bought a property at a foreclosure sale last month and recently recorded the title deed. The title company gave me bad info and there is a 1st loan on the property- a hefy one that is not just in default but going to sale next week. I recently found out about it via a notice of sale that I received in the mail.... should I let it go to sale, will my credit be affected? I am on title but it is NOT my loan. I don't care about losing the property, just damaging my 750 credit score.
Posted on: 20th Oct, 2007 08:59 pm
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