By Chris Potter - StockMonkeys Contributor
A foreclosure will stay on a credit for up to seven years significantly impacting a borrower's credit history and credit score. Foreclosures along with bankruptcies are two of the most damaging adverse events on an individual's credit report and will serve as warnings to any financial institutions considering extending credit in the future. Many times when an individual or couple purchases their first home the loan officer will tell them that regardless of anything else that happens in their life, always pay your mortgage.
When a mortgage lender extends credit to allow someone to purchase a home it is in their best interest to keep that homeowner from defaulting if possible. They understand the negative implications on a credit report and how it can create a downward spiral leading to bankruptcy. Because of this, they also consider initiating foreclosure proceedings to be an option of last resort. There are some tools available for homeowners to work with their mortgage lender should they come under financial duress and are unable to make their mortgage payment. Some mortgage lenders will provide assistance in the form of "forbearance payments " to help make it easier for the homeowner to make payments. Forbearance payments result in a suspended or reduced payment amount for a short period of time to allow the homeowner to get back on their feet, typically up to 90 days. If this does not work, then the mortgage lender often has no other option but to initiate foreclosure proceedings.
Some consumers reach a point where they try to decide between bankruptcy and foreclosure to help eliminate crushing financial debt. While a foreclosure appears on a credit report for up to seven years it also only tackles one problem,
the mortgage payment. A bankruptcy on the other hand last for 10 years on a credit report but it stops all activity including collections on credit cards, repossession of vehicles in addition to foreclosures on homes. The bankruptcy is more severe but it also has the greatest net affect of resetting the financial situation of the filer and providing a fresh start.
In either case, it behooves the consumer to take advantage of all available financial assistance and counseling prior to letting their home fall into foreclosure. There are numerous nonprofit resources available which can help renegotiate mortgage terms to lower interest or payments. If the financial difficulties are temporary, it would be unfortunate to take such a large hit your credit score. A foreclosure appearing on a credit history can make it almost impossible to get any additional lines of credit in the future. Bad credit can also limit an individual's ability to obtain employment or to rent since credit histories are normally part of the evaluation process.
During the seven years that a foreclosure is on a credit report it is important for the consumer to take all proactive measures to clean up their credit history in other areas. Obtaining a secure credit card with a low limit and paying it off every month will begin the healing process. Paying off all other outstanding obligations such as student loans or auto loans will also lower your credit utilization ratio and demonstrate responsible financial behavior. These steps won't eliminate the negative impact from a foreclosure but when you seek additional lines of credit you can point out that the situation was an isolated incident and use all the other information on your credit report to demonstrate your credit worthiness.
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