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How Foreclosure Affects Your Credit Score
Home foreclosures have become a concern for many people. Some may not consider how foreclosure affects your credit score. This article defines what foreclosure is, and how foreclosure affects your credit score. Keep reading for more info. on foreclosures.
Foreclosure seems to be in the news a lot lately. What many people don’t think about, though, is how foreclosure can affect your credit score. And that is unfortunate because foreclosure is one of the most damaging things to your credit score.
What is foreclosure?
Foreclosure is when your mortgage lender possesses your property due to stopped payments. It is important to realize that, when you have a mortgage, you do not actually own your property. The bank does, until you pay off your loan. If you are not making payments on your mortgage, then the bank has the right to claim ownership of the home and then resell it.
For the most part, a mortgage lender won’t start foreclosure until after you have missed three payments. It is usually a good idea to contact your mortgage lender when you become aware of problems to try and work out a payment plan to help you prevent foreclosure. It is actually more expensive for a bank to foreclose on a home than it is for a mortgage to be paid out in full.
How foreclosure affects your credit score
Foreclosure is extremely damaging to your credit score. Indeed, only bankruptcy and some judgments are more damaging than foreclosure to your credit report. And, once a foreclosure is on your credit report, it is likely to remain for seven to ten years. Additionally, a foreclosure can bring your credit score down as much as 300 points – or more, depending on how long your payments have been missed. There is no disputing a foreclosure on your credit report. Once it’s there, it is there until it is no longer considered “timely.”
When foreclosure brings your credit score down, it has a huge effect in other areas of your finances as well. A low credit score can affect whether you are approved for credit, and it can also affect whether or not you get favorable loan terms when you are approved. And, in the current economic climate, with the credit market crisis influencing lenders, it is not particularly surprising that lenders have tightened standards so that your credit score is even more important.
Loan terms are also a big deal. When you are approved for a loan, a lender will look at your credit score and your report to see what kind of interest rate you will get. Your interest rate is how much money you pay each year as a fee for borrowing the money. If you have a low credit score, you are considered a risk to the institution. A low credit score – especially if there is a foreclosure on your credit report – indicates that you may not have been trustworthy in the past. You defaulted before, and you may do so again. As a result, lenders will charge you a higher interest rate to borrow money. Just one percentage point on a mortgage can mean thousands of dollars over the life of the low. For someone with questionable credit, the interest rate may be two, three or even four or five points above the best rate offered to those with good credit. In such cases, the difference could be tens of thousands of dollars.
Finally, you normally have to wait between two and three years before anyone will consider giving you a home mortgage loan when there is a foreclosure on your credit report. You might have to wait five or six years – and show good credit habits – in order to get an interest rate that is even somewhat reasonable.
Avoiding foreclosure is an important part of keeping your credit score intact. Credit card defaults, while damaging, do not stay on your credit report as long as foreclosure, and they do not have the same long-term effects.
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