Does foreclosure affect credit? The simple answer is yes. To better understand how foreclosure affects credit, though, you need to first take a look at how a foreclosure works.
What is foreclosure?
Most homeowners have a vague concept that foreclosure is a scary word, but unless you're actually involved in a foreclosure, you might not know exactly what it is. Simply put, foreclosure is when you default on your home loan and the bank takes possession of your house. Foreclosure is usually a long, drawn-out process. Beyond the simple necessity of leaving your home, foreclosure does affect credit. How does foreclosure affect credit? That question is a little more difficult to answer.
The foreclosure process.
A bank typically begins foreclosure proceedings when you're 60-90 days behind on your house payment, although this can vary from lender to lender. You'll receive a series of letters informing you that your mortgage payment is late and unless you pay immediately, the bank will foreclose on your home. This is the first phase in which foreclosure does affect credit. Mortgage companies report your late payment to credit bureaus, and your credit score begins to drop.
This is usually the point when most homeowners contact their lender in an attempt to work out some sort of repayment plan. The lender would rather have you repay your mortgage than foreclose on the property, so most lenders are usually willing to work with you somewhat on developing an acceptable payment plan. This is the best place to stop foreclosure, raise credit and get back on your feet. Make an effort to negotiate a repayment plan. At this beginning phase, your credit has only begun to drop and foreclosure credit repair is a fairly easy process.
If you are unable to work out a payment arrangement, the bank will begin formal foreclosure proceedings. At this point, the lender may report to credit bureaus that foreclosure proceedings have begun. If you reach this point and then later work out a payment arrangement, your credit report may still reflect that foreclosure proceedings did begin. If you manage to avoid foreclosure and find that your credit report mentions the foreclosure, you have a few options to try to remove that item. The easiest route is to ask the lender to remove the item from the credit report.
Once your property does proceed to foreclosure, the lender will begin eviction proceedings and you'll be forced to leave your
home. This process typically takes anywhere from three to six months from the date you begin to fall behind on your mortgage payments. The exact time varies from state to state, the individual lender and whether you are also in the process of a bankruptcy. During this time, if you know you can't avoid a foreclosure, some experts recommend that you save your mortgage payments to help pay off debts or find a new place to live.
How does foreclosure affect my credit?
Answers to this question vary widely from source to source. The bottom line is that no-one really knows exactly how foreclosure affects credit. Credit reporting bureaus don't publicize their knowledge, although some experts do know that people may fall into many different 'credit models.' The exact effect of foreclosure on your credit depends on which 'credit model' you fall into. At the very least, expect your credit score to drop a hundred to possibly several hundred points.
Stop foreclosure - raise credit.
In many cases, foreclosure isn't inevitable. If you're having trouble making your mortgage payments, contact your lender. It's in the lender's best interest that you continue to pay your mortgage, so try to work out some payment agreement. If you've been injured or lost your job and are unable to continue your mortgage payments, a lender may be willing to consider a short sale or a deed in lieu of foreclosure. Both of these are viable alternatives to foreclosure that won't affect your credit as drastically as foreclosure. Unfortunately, not all lenders accept a short sale or deed in lieu of foreclosure. Check with your lender if you want to stop foreclosure and raise your credit.
Foreclosure credit repair.
Even if you are unable to avoid foreclosure, it doesn't have to ruin your credit forever. It's possible to begin credit repair for foreclosure immediately after the foreclosure itself. First, pay all of your other bills, if possible. If you're able to maintain good credit aside from the foreclosure itself, a lender is more willing to consider mitigating circumstances. Also, regularly paying your other bills, especially other lines of credit, will slowly raise your credit score over time. If you'd like to learn additional ways to repair credit after foreclosure, sign up for our free newsletter. If you're looking for results fast and don't have time to wait for a newsletter article to help you, check out the Credit Secret Bible .