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When you’re in a tough financial situation, you spend a lot of time trying to find a way out. You’re already making critical decisions about who to pay and when, how to keep the lights on, and may even be answering — or avoiding — calls from your mortgage lender.
Let’s take a quick look at foreclosure and dive into how it affects your credit score.
What Is a Foreclosure?
Generally speaking, a homeowner defaults on their mortgage when they miss an agreed-upon monthly payment, although it can also happen when the borrower violates other conditions outlined in the mortgage instrument.
Foreclosure is a legal procedure in which a lender takes possession of the mortgaged property and sells it to recover the amount owed on a defaulted loan.
Can You Avoid a Foreclosure?
The foreclosure process involves a number of steps and can take several months, giving you an opportunity to find an alternative to losing your home.
FAQ: How Does a Foreclosure Affect Credit?
Your credit score is based on information from your credit reports and is used to predict how likely you are to pay back a loan on time. When applying for a loan, credit card, or even a rental property, your credit score plays a significant role in being approved.
Although you can obtain a future mortgage after foreclosure, it is definitely challenging to obtain loans since lenders view foreclosure as an adverse event and may not work with you.
1. How Much Will a Foreclosure Lower Your Credit Score?
Your credit score may suffer drastically as a result of foreclosure; in fact, you can expect to see a drop of more than 100 points, depending on your credit history. This is a significant drop, making it extremely difficult to obtain credit approval at all or forcing you into very high-rate loans.
2. How Long Does a Foreclosure Stay on Your Credit Report?
Unfortunately, a foreclosure has a long-lasting negative impact on your credit score. The effects are most prominent in the first few years, but your credit report typically contains foreclosure information for seven years following the foreclosure date.
3. How Can You Remove a Foreclosure from Your Credit Report?
The question of how to remove a foreclosure from your credit report comes up frequently. Unfortunately, credit bureaus are typically very accurate in their reporting.
It is recommended to check your credit report and make sure this happens. If it isn’t removed, you can request it be removed by demonstrating that it happened at least seven years ago.
However, the most effective way to get a foreclosure off your credit report is by never letting it get there to begin with!
You May Have More Ways To Avoid Foreclosure Than You Think
1. Are There Foreclosure Prevention Programs?
You can find foreclosure programs. Some of these are legitimate and require you to meet specific requirements, such as where you live.
There are also foreclosure scams, so it is important to be aware of and avoid fraud.
2. What Alternatives Are There to Foreclosure?
There are common alternatives to foreclosure:
Communicate With Your Lender
You can start by communicating with your lender and developing terms to help you avoid foreclosure. You can negotiate with the lender about:
- A loan modification.
- Applying for forbearance to temporarily pause or reduce payments during your financial hardships.
- You can also set up a repayment plan to gradually catch up on missed payments.
Although coming to an agreement with your lender is the best outcome, it isn’t always possible.
Sell Your Home Prior To Foreclosure
You can also use the option of selling your home before foreclosure. You can start by determining the current market value of your property.
Consider different selling options, such as listing your home on the market, selling it off-market, working with real estate investors, or exploring short-sale opportunities.
3. What if You Want To Stay in Your Home?
Selling your home before the foreclosure is final is a great solution, but what happens if you need to stay in the house for a few more years until your kids graduate or you make that planned move out?
For many homeowners, selling their home and renting it back from the buyer is the best of all worlds. Also known as a residential sale leaseback, you can sell your home directly to a cash buyer — avoiding the hassles of repairs, listings, showings, and credit checks — and enter into a lease agreement for a pre-determined length of time.
Selecting Your Phoenix Foreclosure Alternative
The long-term impact of foreclosure on your credit score is significant and definitely something to be avoided. With so many options, though, how do you know which one is the right one for you?
At The District PHX, we have helped many Phoenix residents avoid foreclosure. Because we’re your neighbors, we want to build a relationship with you as we help you navigate this challenging time.
We offer a real difference. We are in your corner, and we can help you quickly while being fair and honest. Feel free to contact us today and start to explore your options to avoid the consequences of foreclosure.
