A foreclosure is a substantial negative event in your credit history that will significantly lower your credit score and limit your ability to qualify for credit or new loans for many years afterward. If you’re considering a foreclosure, you may be wondering what is the long term effect of foreclosure? Here’s what should know about foreclosure and how it can impact your life.
A foreclosure occurs when a mortgage lender takes back ownership of a property from a borrower when the borrower fails to keep up with their loan payments. The lender is legally permitted to seize the property to recover as much of the loan amount as possible.
A foreclosure typically shows on your credit report within a month or two after the lender initiates foreclosure proceedings and remains on your credit report for seven years from the date of the first missed payment that led to the foreclosure. Foreclosures have an extensive negative impact on credit scores, but as with all derogatory credit report entries, the number of points by which they’ll lower your score depends on many things, such as what your score was before foreclosure and the number of negative entries on your credit report.
Foreclosures typically occur only after you miss at least four successive monthly payments. Missed payments bring down credit scores more than any other negative entries, so your credit scores generally will have dropped substantially even before a foreclosure appears on your credit report.
Arguably more significant than its effect on credit scores is the negative way in which many lenders perceive foreclosures. Every lender sets its own lending criteria, and there’s no universal rule about how a lender will treat a foreclosure, but typically lenders consider foreclosure a serious derogatory event in your credit history, second only to bankruptcy in terms of significance. Many creditors won’t even consider applicants with foreclosures on their credit reports, while others may forgive foreclosures that are several years old as long as the applicant meets the rest of their lending requirements.
A legitimate foreclosure can’t be removed from your credit report before seven years from the date of the first missed loan payment. At the seven-year benchmark, the entry should fall off your credit report on its own. If for some reason it’s not removed from your report after that date, you can use the credit report dispute process to have it removed.
A foreclosure is a difficult process that can have major negative impacts on your credit, but with time and good credit habits, it is possible to recover and one day buy another home. A foreclosure can also have a negative impact on your mental health. Normally, going through a foreclosure adds a lot of stress to your life which can even impact your physical health, so its best to do everything in your power to avoid foreclosure. If you have questions about credit or foreclosure, contact Primary Residential Mortgage. We’re here for you.
Note: Opinions expressed are solely my own and do not express the views of my employer