A foreclosure is a legal process whereby a lender takes control of a home after the homeowner fails to repay their mortgage. However, smart homeowners can choose to short sell the home and evade the foreclosure.
If your mortgage lender sends you a default notice, you may start wondering about its possible ramifications, like how it can affect your credit. The notice is usually sent 60-90 days after falling behind on mortgage payments.
A foreclosure is bad and can adversely affect your entire life; you may lose your home. Sometimes there are no other options. A foreclosure can hurt your credit score and linger on your credit report for years, but that doesn’t mean you can’t work back towards homeownership.
How Long Does a Foreclosure Stay on a Credit Report?
After foreclosure, the mortgage lender reports it to the three major credit bureaus (TransUnion, Equifax, and Experian). From then on, the foreclosure remains on your credit report for seven years from your account’s original delinquency date.
The original delinquency date is the date of the first missed payment that caused the foreclosure status.
How It Affects Your Credit
How foreclosure affects your credit depends on your credit score before you started defaulting on mortgage payments. The higher the credit score, the greater the possible impact.
According to CNN Money, FICO, the data analytics company that developed FICO Scores, says a foreclosure can drop your credit score by at least 100 points.
From the moment a foreclosure affects your credit, it might take 7 to 10 years before the credit recovers completely. A low credit score means you can’t easily access a loan to buy a new home, a car, or other major items.
Removing a Foreclosure from Your Credit Report
There are some situations in which you can remove a foreclosure from your credit report to improve your financial situation.
The Foreclosure Is More Than Seven Years Old
According to the Federal Credit Reporting Act, foreclosures and other types of negative information should be deleted from a credit report after seven years. However, this doesn’t always happen.
What to Do
If seven years have elapsed, you’ve got the right to communicate to the three credit bureau organizations and request them to remove the details.
A Mistake Was Made By Your Lender
Many errors can occur in foreclosure cases, like not following the right procedure or red tape issues. If mistakes occur, it’s possible to have the foreclosure wholly removed.
What to Do
After receiving copies of your credit report from the credit bureaus, go to the foreclosure entries and look at the details.
Specifically, look at your account number, foreclosure balance, the lender’s name, and the dates associated with your account. If you come across any incorrect information, dispute it right away.
The Mortgage Lender Is No Longer in Business
Often, foreclosures and mortgages are sold by one bank to the other, resulting in tons of paperwork. Such sales can make it difficult for banks to maintain accurate records.
Consequently, it may become challenging for individuals to make their mortgage payments punctually.
If the mortgage lender indicated on your credit report no longer operates, they won’t be available to validate the foreclosure. Any details on your credit report that can’t be confirmed must be removed.
What to Do
Contact your mortgage lender to establish if they are still in business.
If their phone numbers or emails no longer go through, or they communicate back to say they are no longer in business, you can write to the credit bureau. Request them to remove foreclosure details from your account because there’s no lender to validate it.
How to Rebuild Your Credit after a Foreclosure
To repair your credit after a foreclosure, do the following:
Adjust the Way You Spend
If budgeting hasn’t been your lifestyle, start now. If you used to budget prior to foreclosure, but couldn’t stick to the budget, start over.
Create a budget and note down the actual spending. That way, you can tell if you overspend and continue to refine your budgeting skills.
Pay All Your Bills on Time
Pay credit card debts promptly because they are regularly reported to the credit bureaus. The positive payment history can help “pad” your score and prevent the foreclosure from completely hurting your credit.
Lenders who manually assess credit reports may be more lenient with your loan request after seeing that the mortgage was the only factor affecting your credit.
Remember to pay all other bills on time, too.
Don’t Take New Loans
You may think that taking a new loan will help, but don’t fall into the trap. Taking a new loan raises your debt-to-income ratio. Instead work on paying off the existing debt before you think of a new loan.
A Foreclosure Shouldn’t Hinder You from Buying or Selling a Home
While a foreclosure may stick on your credit report for seven years, you can still sell or buy a home during this time.
If a past foreclosure is still on your credit report and you’d like to sell your home, a Clever Partner Agent can help. They can sell the home and discount their commission. The best part is you only pay commissions after the home sells.
If you’d like to buy a foreclosed home, a Clever Agent can also help you to find the right house with ease.