Since the recession began, more than 4 million homes have been foreclosed upon. If you're one of the homeowners whose home was or is being foreclosed upon, you may be wondering what's going to happen next. How long will the foreclosure process take and how will it impact your financial future? This guide can help.
How long will the foreclosure process take?
The foreclosure process varies from state to state, but in general, borrowers can expect a warning phone call or letter from their lender when they are 30 days or more late with their monthly payment. After about three months or more of missed payments, your lender will send a “demand letter' or “notice to accelerate,' which outlines the amount you are delinquent and the date you must pay that amount by; should you not pay by the date, the lender will start foreclosure proceedings. Once that happens, the lender's attorney will schedule a date for the sale of your home (this is the technical day of the foreclosure), which can sometimes take as little as two to three months, though it often takes longer. In some states, at the time of the foreclosure sale, you lose all rights to your home; other states have a redemption period during which you have one more chance to pay your debts and reclaim your home. From the first missed payment to foreclosure and redemption period, the entire process will likely take more than a year.
Will a foreclosure impact my credit score?
Unfortunately, a foreclosure hurts your credit score, which means that it will be harder and sometimes impossible to get credit cards and loans in the coming years and that you can expect to pay higher interest rates. Plus, some employers look at your credit score, which means that it may make it more difficult to land a job.
Experts estimate that a foreclosure will lead to a dip in your credit
score of about 200 or 300 points. So let's say you had a near-perfect 800 FICO score pre-foreclosure; after the foreclosure, you might have a credit score that was more in the 600 or lower range, which is considered bad (FICO scores range from 300 to 850).
The good news is that foreclosures will clear your credit report after seven years, and that if it was an isolated incident -- you didn't also default on a bunch of other payments -- it won't have as large of an impact on your credit score. Going forward, try to pay all of your bills on time and minimize the amount of money you owe, as these can help boost your credit score.
How long do I have to wait until I can buy a home again?
If you've been through a foreclosure, you can expect to have to wait between about three and seven years -- depending on why you defaulted, your current credit score and the type of loan you're applying for, among other factors -- before buying a home again. Buyers who lost their homes due to economic hardships such as losing their job, illness or getting a divorce may have to wait less time to buy a home than those who walked away from an underwater mortgage even though they were able to pay or those who couldn't pay once the rate increases on their adjustable-rate mortgage kicked in, experts say. Potential buyers must show that since the foreclosure they have raised their credit score significantly by paying all bills on time and not taking on too much debt. The time period you have to wait before buying again also depends on your lender. For example, Fannie Mae requires borrowers to wait five to seven years to buy after a foreclosure and three to seven after a foreclosure with “extenuating circumstances' (which are factors such as illness and severe injury that were beyond your control).