If you are considering allowing your home to go into foreclosure, think again. There are several legal consequences to foreclosure and several pragmatic consequences, one of which is a huge decrease in credit score. A foreclosure could feasibly drop your credit score by 200 points or more, effectively moving you from “good” credit to “poor” credit in one step.
In today’s housing market, foreclosures are a grim reality. Some people simply cannot continue to make their house payments after the loss of a job or being lured into a “quick and easy” mortgage which includes a large balloon payment or a floating interest rate. The sad truth is that millions of Americans face the loss of a home for which they have paid for several years after an upset in finances.
Others, however, view foreclosure as a way out of a problem situation.
There have been a large number of “convenience foreclosures” in the last five years; one way this is described is “leaving the keys on the counter and walking out.” In these cases, the situation most often involves relatively new mortgages made to people who have little to no money to put down on a house. If the buyer financed 100 percent of the housing cost, and even took extra money for repairs or other expenses, he or she has virtually no equity in the house and may view the situation in terms of a rental rather than ownership. It is very easy for someone in this situation to believe that simply walking away from a problematic mortgage is the solution to a reverse in financial stability due to job loss or the desire to move.
However, many people do not realize the tremendous impact a foreclosure has on credit scores and the legal problems which may trail someone who has walked away from a mortgage. A credit score is updated on an “on demand” basis as creditors report to the three major credit bureaus: TransUnion, Equifax, and Experian. Your credit score is updated when creditors report or when someone requests your credit score.
When will my mortgage company start reporting my late payments?
Your mortgage holder will begin negative reporting to the credit bureaus the first time you are 30 days late with your mortgage payment. Therefore, before your foreclosure even
begins, you will have negative marks on your credit, bringing your score down. Most banks wait until you are 90 days behind in your payments to begin foreclosure proceedings, which often take two or three months to complete. By the time your foreclosure is actually finalized, you will find that your credit score is reflecting six months of missed payments; this can take your score down by up to 200 points.
Even more sobering is the fact that a foreclosure is not the end of your legal problems with your mortgage. Your house will be sold on the foreclosure market. At this point, banks are only worried about recouping their losses; however, it is entirely possible that the bank will have to take less than it is owed on the house, especially if the bank made a 100 percent loan to begin with. If there is an overage which is not covered by the sale of your house, you could be legally liable for that balance, and a bank can move to garnish your wages to collect its money. At this point, most people are forced to file bankruptcy to finally clear the debt.
No one wants to deal with foreclosure
Unfortunately, some people suffering medical issues or job loss have no choice. If you know that you are going to be unable to make your house payments, your best approach is to talk to your lender immediately, before you are in arrears on your mortgage payments. Ask for a specialist in refinance and deferment options. With so many foreclosures clogging the market, banks are anxious to work with customers who make an effort to pay their house payments. You may be able to defer a payment or two which will not only help keep your credit score high, but will also allow you some time to find another job or to save up some money for your next payment.
Another possibility is to refinance your existing loan. If you have any equity at all in your house, you may be able to get a better loan with lower interest and payments from your current lender or a new lender. A final option, if you are selling your home, is to rent it temporarily or borrow money from another source until your house has finally sold.