The economic fallout due to the Covid-19 pandemic has led to a dramatic increase in foreclosures. Now that most government deference programs have ended, foreclosures in the third quarter of 2021 jumped up 67% from the third quarter of 2020.
A foreclosure can be difficult to stop, but there are ways to catch up and remain in your home. If your credit score or payment history has made it difficult to qualify for a loan modification, refinance, or home equity loan, a co-investment could be what you need to get caught up and avoid a foreclosure.
A foreclosure will impact your credit for seven years, so you should try to prevent it from happening at all costs.
Foreclosure is the term for whenever a lender takes ownership of a mortgaged property due to the loan being defaulted. It usually takes a few months of missed payments in order to trigger a default, but the specific terms and conditions may vary depending on the mortgage agreement.
Since most mortgages rely on the property to be used as collateral, failure to repay the loan usually results in the property being seized by the lender. After seizing the property, the lender will try to resell it in order to recover the amount of money remaining on the loan.
The exact process of foreclosure will be different for each state but will typically follow this pattern:
A foreclosure will remain on your credit report for seven years from the date of the first payment delinquency. You won’t be required to take any action because the credit bureaus will automatically remove the foreclosure from your credit report after reaching the time limit.
Other than simply waiting it out, there isn’t much that can be done about removing a foreclosure from your credit as long as it was legitimate. However, if the foreclosure was inaccurate, you might dispute it with the credit bureaus.
Credit reports are typically accurate, so the chances of having a foreclosure removed are slim. You would need to provide all relevant information about the foreclosure and why you think it was illegitimate. The odds of successfully disputing a foreclosure are very low since mortgage agreement terms are usually very clear about the potential consequences for defaulting.
A foreclosure is considered to be a derogatory event on your credit and can have a substantial impact on your overall score. There is no specific number that a foreclosure will deduct from your score, but it will generally result in a drop of at least 100 points or more. The overall drop will be much higher if you have a higher score.
Most of the damage to your credit is done before a foreclosure is declared. Each missed mortgage payment will be reflected in your credit score and carry its own penalty. The range will typically be between 20 and 60 points, but it could be as high as 180 points, depending on a few factors. It will normally take about three or four missed payments before a notice of default is issued, and a foreclosure is declared. Your score has probably already fallen by at least 100 points by that time, if not much more.
What makes a foreclosure so harmful for your credit is the fact that it will remain on your credit for so long. Missing a few payments can temporarily lower your score, but getting back on track with scheduled payments can help repair the damage over time. On the other hand, a foreclosure acts as a maximum cap on your credit. No matter how positive the rest of your credit report is, a foreclosure prevents your score from reaching more desirable ranges. That’s why it’s so important to avoid undergoing a foreclosure if you can.
Trying to get a new loan for buying a house will naturally be much more challenging with a foreclosure on your credit report. Some lenders also have a waiting period before you can apply for a mortgage again, for example, FHA loans have a 3 year waiting period.
However, as long as your credit report has consistently improved since the foreclosure, you can probably get a home loan with a score of around 640 or higher.
While a lender might grant a home loan request with a foreclosure, it will often come with extra fees or a higher interest rate. There are still plenty of lenders who use foreclosure as a reason to disqualify a loan request automatically, so you might have to shop around for a bit.
Foreclosures will remain on your credit report for seven years before being removed. Seven years is a long time to deal with a reduced credit score. It can be challenging to try and manage your finances with a poor credit score, so it’s important to avoid foreclosures if you can. Balance Homes might be able to help you avoid foreclosure.
Plenty of homeowners will attempt to refinance their mortgage to avoid foreclosure — however, due to a dropped score and multiple payment delinquencies, the request is usually denied. While this can be an effective strategy for some, it won't always be an option for everyone. Balance Homes offers an alternative option for those struggling to qualify for a refinance. Get your free proposal today and learn about how you can avoid foreclosure while staying in your home and lowering your monthly payments.