If you’ve fallen behind on your mortgage payments and are concerned you may be facing foreclosure, it’s important to know the process and what impact foreclosure may have on your finances. Below, we detail when foreclosure occurs, how it affects your credit, and how you can try to avoid it to save yourself the credit damage.
When does foreclosure happen?
When a homeowner falls behind on mortgage payments, a lender can repossess the home. Usually foreclosure can’t begin until a homeowner is 120 days late or more on their payments, but this varies with location and situation.
There are two foreclosure processes that a lender can choose: judicial and nonjudicial. Judicial foreclosure is when a lender files a civil lawsuit in court, which gives the borrower a chance to defend themselves. Nonjudicial foreclosure, on the other hand, bypasses the court process and proceeds with the steps outlined in the power of sale clause in the deed of trust or mortgage contract.
How will it affect my credit?
Unfortunately, you can expect a significant drop in your credit after a foreclosure, as payment history is the largest factor of your FICO credit score, accounting for 35% of the total. Experts estimate anywhere from a 100 to 300 point drop after a foreclosure. Even if you have near-perfect or perfect credit, you will likely be left in the “bad credit” range after dropping by hundreds. Further, the credit points lost from the missed payments that caused the foreclosure will contribute to an even larger total decline.
How will this impact me?
One of the results of a credit drop is a long wait time before you can buy another home. It can take as little as three years before you can buy another home—or it could take seven. Various factors influence the amount of time it will take, including:
- What your credit score was before the foreclosure
- Why you lost your home—whether it was from an illness, losing a job, or walking away from an underwater mortgage
- How much your credit score has increased since the foreclosure, depending on factors such as paying bills on time or taking on more debt
- How long your lender requires that you wait
Thankfully, foreclosures will clear from your credit report after seven years, so after a decent waiting period, it may not hurt you too much in the long run, as long as the foreclosure was an isolated incident. Start repairing your credit immediately after a foreclosure with on-time payments, using less than 30% of your credit limits, and looking into options like credit-builder loans. If, after seven years, you notice the foreclosure didn’t automatically fall off, be sure to dispute the error.
How can I prevent a foreclosure?
Foreclosures are a result of missed payments, so as soon as you begin to fall behind, reach out to your lender. Remember that you and your lender are not opponents in this situation; you are on the same side. It is in the lender’s best interests to maintain the loan and not lose money in the event of a foreclosure. Communicating your issues, the reason for the financial struggle, and how long you think the problem will last is a first step in avoiding foreclosure.
Consulting an approved housing counselor who can help you navigate your situation might shine some light on options you weren’t aware of. You may qualify for a special assistance program that a counselor can connect you with. Proceed with caution, though, and be conscious that there are scams out there under the disguise of housing counseling. Do your research to find real, credible companies—remember, if it sounds too good to be true, it probably is.
Short sales from a lender can also occur when a borrower is facing foreclosure. A short sale is when the bank accepts a payoff for less than the loan balance. Although not optimal for the borrower or the lender, it can save a lender money that would be lost in a foreclosure, and it will significantly reduce the amount the borrower’s credit will drop.
You may also want to consider a direct sale of your house. Direct sales are cash buys by investors that skip the sale process and can take just a few weeks. Ryan’s Buying is a great option to sell your home directly and avoid the costly credit damage that comes with foreclosure. Do not call an agent, call you buyer!