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How Foreclosure Affects Your Credit Report
By plrprousers | November 6, 2008
This year, 5.5 million homes went into foreclosure proceedings and 5.5 million Americans will lose their most valuable assets, their equity and their self esteem. Following a foreclosure, one’s credit report is marred for seven years or longer, even if there was clear credit before that incident. One instance of foreclosure will result in as much as 300 points deducted from the credit score, in addition to higher taxes and the inability to borrow money in the future. However, if this end cannot be prevented, there are still some ways to improve the situation.
Once you’ve looked at your credit report, you’ll need to focus on improving your credit score. Pay all your outstanding bills on time, first and foremost. On-time bill payments account for roughly 35% of your credit score. Start with the highest interest rate cards and reduce your credit usage to 30% of what’s been extended to you. Replenish your savings, your 401k and other retirement accounts. You may want to contact CCSInc.org to obtain credit counseling and take free financial classes to re-educate yourself on how to save and spend wisely. A foreclosure can really shatter your confidence, as well as your purchasing power, so it’s important that you take this opportunity to reassess how you approach financial decision making as a whole.
So which is worse for your credit score, a foreclosure or a bankruptcy? Even though bankruptcy stays on your credit for 10 years and a foreclosure for 7, “a foreclosure is very serious to mortgage lenders,” said Ray Hooper, Education and Housing Director for the Consumer Credit Counseling Service. “They’re going look at a foreclosure more seriously than they will a bankruptcy that doesn’t include the house.” Hooper says if you’re receiving default notices but still want to keep your house, then you’ll need to catch up on those missed payments.
You can modify the agreement to a lower interest loan or ask for forbearance, which involves the lender agreeing to suspend payments until you get back on your feet. If you outspent yourself and wound up in a real pickle, then you can ask the lender to hold off on foreclosing until you sell. In some cases, you might not get the asking price and will still owe money to the lender. This procedure is called a short sale. In other cases, you may negotiate a “deed in lieu of foreclosure,” which means you will give your house back to the bank and walk away with nothing, including clear credit.
If you’ve already faced a foreclosure, then the best thing you can do, aside from paying everything on time, is to raise a fuss. Some homeowners may be able to persuade a lender to remove the negative hit from their credit report. However, this is certainly not easy, and usually involves a legal attorney and a chunk of cash. Otherwise, the foreclosure will come off your report automatically in seven years. You’ll probably have to dispute, threaten, sue and file complaints to get there, but often the bank would rather pay you off with clear credit than endure your barrage of aggravation. It’s an ugly process, but if you’re in a desperate situation or if you previously had a high rating credit score, then you may want to consider the attorney route.
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