How Does Foreclosure Affect Your Credit?

How Does Foreclosure Affect Your Credit

Foreclosure is a scary word, and if you’re facing the possibility of losing your home, it’s easy to feel stressed and overwhelmed. Nobody wants to go through foreclosure, but it happens on a daily basis. So, how bad is it? How does it affect your credit? Is it survivable? We’ll get into the nitty-gritty details and let you know what to expect from foreclosure and how to try to avoid it.

In Short, It’s Devastating 

Here’s the brief summary. Foreclosure is devastating to your credit score. If you have a chance to avoid foreclosure, pursue it. Getting yourself out of foreclosure in the short term can prevent a long-term problem that will stay with you for a long time. 

Why is it So Bad?

There are two aspects of foreclosure that hurt your credit score. One is your credit history. The other is the length of a penalty for foreclosure. Let’s start with the former.

Foreclosure in Your Credit History Influences Lenders 

If you default on a mortgage, that tells lenders that you are a high-risk prospect. That may feel uncomfortable to hear, but that’s how lenders operate. For a lender, the foreclosure process requires money and time to repossess the home. The lender’s goal is not to take your home. It’s to get paid. So a potential foreclosure makes a lender very hesitant. The thinking is, if you’ve had one before, you may have one again. Foreclosure is one of the biggest negatives you can have on a credit history. Only bankruptcy is worse.

While there are too many variables to say exactly how many points your credit score will lose, it’s safe to say that the vast majority of lenders will not approve any type of loan to you until the foreclosure falls off of your history.

The Foreclosure Stays On Your History For a Long Time

This brings us to the second problem. It’s bad enough that a foreclosure is on your credit history. But even worse, foreclosures don’t go away quickly. They can show up on your credit report within a few months of the beginning of the foreclosure process. If you can rectify the foreclosure before the house is repossessed, your credit report should reflect that, although this may take a few months. If the foreclosure goes through the complete process, it will remain on your credit report for seven years. During that time, finding a lender who will extend credit to you can be very difficult. 

This can feel like a lot, but there is a way out. Even if you lose the house, you can negotiate with the mortgage lender to repay the debt and have the foreclosure removed from your credit history. Sometimes, that’s a good way to fix a bad credit score. Without this, you’re likely not getting any loans until several years after the first missed payment that led to foreclosure.

Avoiding Foreclosure

If you can avoid foreclosure, your future self will thank you. There are a few options available to help you. The first is catching up on payments. If that was so easy, foreclosure probably wouldn’t be discussed in the first place.

The second option is to modify the loan. You talk to the lender and try to come up with a new payment plan that you can manage. If this negotiation is successful, you have a chance to avoid foreclosure, but you have to be able to manage the new payment schedule.

Your third option is to sell the house. Ideally, you want to sell the house for more than you owe. That allows you to settle the debt and put some cash in your pocket.

If you can’t sell the house for enough money to cover the mortgage, you can talk to the lender and discuss a short sale. In a short sale, the lender will set a minimum on how much you can sell the house for. If the house sells, the lender gets their cut. Since it’s a short sale, you won’t get any money from selling the house, but the debt will be considered settled in full, and your credit score will be saved.

Sell Your House for Cash Today

There’s one last option, and it may be your best option. Frank Buys Houses is a real estate investment group that buys houses for cash. We can close in as little as seven days, and when foreclosure is imminent, time is of the essence. We regularly work with people facing foreclosure to explore every solution and find the best resolution possible. Contact Frank Buys Houses online or call us at 209-395-1355. Let’s talk through your options and see if we can help.