How Will A Foreclosure Affect Your Future?
If you happen to be one of the millions of homeowners who have experienced a home foreclosure (in the past or currently), you might wonder how this will affect your finances in the future. How long does the foreclosure process take, and will it be on your financial profile forever? Here’s a quick guide to answering those questions:
How long does the process take?
Usually, homeowners can expect a letter or phone call from their lender to warn them if their mortgage payment is 30 days (or more) late. If you have missed three months of payments, you will receive a “demand letter” from your lender (which can also be referred to as a “notice to accelerate”) that will state how much you owe and the date that amount must be paid. If they do not receive your payment by that date, your lender will begin the foreclosure process.
After this starts, a date to sell your home will be scheduled by the lender’s attorney (which because the official foreclosure date), and while this can sometimes be less than 3 months later, the process usually takes longer than that. Depending on which state you are in, the date of your foreclosure is also the date you lose the rights to your home. Other states will have what is called a “redemption period” during which you get once last chance to pay the debts you owe. The entire foreclosure process, from the date of your first missed payment and including the foreclosure and redemption period, will usually take over a year.
How much does a foreclosure negatively affect my credit score?
Unfortunately, the negative impact on your credit score from a foreclosure is significant. It is much harder (and sometimes impossible) to get loans and credit cards in the years following a foreclosure, and even if you can manage to get a loan, the interest will be very high. Sometimes employers will look at your credit score too, which would make it more difficult to get a job as well.
According to experts, your credit score will drop between 200 and 300 points after foreclosure. So if you had an almost perfect credit score of 800 before the foreclosure, afterwards it might be around 600 or lower, which is not considered a good score.
Fortunately, foreclosures will be erased from your credit report after 7 years. If that foreclosure was the only major incident, and you didn’t default on other payments, your credit score won’t be affected as negatively as it could have been. Make sure that you make all of your payments on time moving forward and try to minimize your debts as much as possible. Both of those will help your credit score recover in time.
How long will it take before I can buy another home?
After going through a foreclosure, many people have to wait anywhere between 3 and 7 years before buying another home, and the timeframe really depends on your credit score, the type of loan you want, and the reason why you had defaulted on your previous loan.
Losing your home to economic hardships like unemployment, illness, or divorce might result in less time you will have to wait, while other scenarios like walking away from an underwater mortgage when they could have afforded the payments or being unable to pay an increased rate after their ARM adjusted will usually result in having to wait longer. Those who wish to buy another home after a foreclosure have to prove that they have worked to raise their credit score again by making timely payments and not getting into too much debt.
The time period that might be required after a foreclosure will also depend on the lender. Fannie Mae, for example, requires potential borrowers to wait between 5 and 7 years to buy again and between 3 and 7 if the foreclosure had “extenuating circumstances” which were factors beyond your control like illness or injury).