Foreclosure is a negative occurrence on your credit card history that can perpetually reduce your credit score, applications for loans, for some years. Foreclosure, however, occurs when a mortgage lender takes possession of the property of a loan debtor, who fails to keep up with his/her loan servicing after a particular period of time – usually four months. For most property owners on the verge of foreclosure, the question that bothers them is: How much of an impact will this particular singular event affect my immediate or future applications for loans? The severity of foreclosure on your credit score are dictated by your financial standing – in most cases – when the foreclosure happened.
FORECLOSURES IMPACT ON CREDIT SCORES
Typically a foreclosure entry appears on your credit report one or two months after the lender initiates the process of foreclosure on your credit score. This goes on to remain on your credit report for seven years; from the first date that you missed payment on your mortgage, up until the day of the property foreclosure. At the same time, for a foreclosure to happen, you need to miss four successive months of non-payment of mortgage loans – 120 days of financial delinquency. As ruinous as foreclosure is on your credit reports, missed payments brings down your credit score more than any other negative entry; in essence, your credit score would have significantly dropped, before the lender decided to foreclose on the property. This becomes compounded if you are also missing payment on some other debts as well. To put it in perspective, for instance, according to FICO, if your credit score is 680, a foreclosure could bring it down, 85 to 105 points; it could drop 140-160 points from an excellent credit score of 780. The implication is that, the higher your credit score, the greater your score will suffer.
ITS IMPACT ON HOUSING LOANS
The adverse effect of foreclosure is that it can make it very difficult to apply for future loans or get approved for future credits. Although it doesn’t eliminate the possibility entirely, other available options such as Subprime loans, which are available to people with negative report on their credit score are loaded with interest loans that are significantly high, increasing your monthly payments exponentially. You should also keep in mind that foreclosures, lead to a waiting period for some types of mortgages: CONVENTIONAL HOMES (7 YEARS), FEDERAL HOUSING ADMINISTRATIVE LOANS (3 YEARS), and DEPARTMENT OF VETERANS AFFAIRS LOANS (2 YEARS). This however can be shortened, if you can prove that the foreclosure occurred as a result of some qualifying hardships like unemployment, medical bills etc. to 3 years for Conventional loans, and a year each for both USDA and FHA loans. Therefore, it would take a while before you could become a homeowner again.
LENDERS PERCEPTION OF FORECLOSURE
Apart from the inability to apply for loans for a certain period of time, the most significant effect of foreclosure on a dropped credit score is the negative light in which most lenders view foreclosures. Since there is no universal rule about how a lender should treat a foreclosure, a lender has his/her prerogative to set a certain standard that a foreclosed credit report might not be able to meet. It is however safe to conclude that most lenders tend to see view foreclosure next to bankruptcy in terms of severity. While many creditors won’t even consider foreclosures on their credit reports, others are bound to disregard foreclosures that are perhaps several years old, if other criteria are met by the applicant.
On the hand, if there are ways to explore – selling of certain expendable properties — in other not to have the derogatory ‘foreclosures’ on your credit report, it should be explored. It would save you the problem that a foreclosure would put you through in the future.