How Filing for Foreclosure Will Affect Your Credit Rating

Foreclosing on your home can be an emotionally difficult experience. What makes it worse is that the foreclosure will also damage your credit rating. The event will influence future lenders strongly and can have a long lasting effect on your finances.

A foreclosure typically stays on your credit record for 7 years. If you have failed to make a payment on your mortgage for some time and are now facing the prospect of foreclosure, then your have to be prepared for a significant hit to your credit score.

Any future loans or mortgages you take will become costlier because of your lower rating. Lenders will view you as a high risk borrower and increase interest rates accordingly. In effect, buying a home or taking any other loan in future will be much more expensive. That is why it is important to explore all possible options to avert foreclosure.

Impact on your credit score

It is difficult to predict exactly how your credit score will be affected by a foreclosure. This is because your score also takes into consideration a number of other factors, most importantly whether you have paid other loans on time.

If your payments are regular with all of your other debts, the foreclosure will have a lesser impact on your credit score. But when combined with a series of defaulted payments and unpaid bills, the foreclosure can have a huge effect and can cause a steep drop in your credit score.

You can get some idea of the impact from this estimate chart by Fair Issac:

30 days late payments: 40 – 110 points decline in credit score
90 days late payment : 70 – 135 points decline
Foreclosure or short sale: 85 – 160 points decline
Bankruptcy: 130 – 240 point decline

Lender’s viewpoint

When a borrower is more than 90 days behind payment date, the lender tends to classify the loan as unrecoverable. Typically, a mortgage lender would rather help you hold on to the house and keep you paying installments, than let it go to foreclosure. A foreclosure can be an expensive affair and will yield less than the loan value in most cases.

Asking the lender for easier terms when your financial troubles start can help you find an effective solution to avert foreclosure. This can protect your credit score from a serious hit and also help you retain ownership of your house.

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