What Happens to My Credit after Foreclosure?

After a foreclosure, you will have to rebuild your credit profile. Any default on a loan will cause a large drop in credit. Defaulting on a mortgage, will significantly dent your financial profile because the loan amounts are high and the contract is considered an installment. Other than a bankruptcy, a foreclosure causes the most significant credit problems.

Small Dips along the Way

Long before a foreclosure occurs, there will be several smaller dips in your credit score. A foreclosure does not take place until you have first been late on multiple mortgage payments. Missing a payment by only 30 days will affect your credit score. If a payment goes 60 or 90 days late, you will begin to see a 30 to 50 point drop, depending on other factors.

Once the debt is reported as delinquent, or "bad debt," your credit score will be very low. However, you can still recover a good score if you pay off the balance before the home is foreclosed on. Once you reach the foreclosure state, it will take much more time and much more effort to raise your score.

Loss of Equity

Your credit score also relies on a determination of how much equity you have compared to how much debt you owe. Your home is likely your greatest asset, and it represents the largest portion of your equity. When you lose this asset, all of the equity you had built in the home is immediately taken away from your personal balance sheet. For example, if you fail to make payments on a few thousand dollars remaining on your mortgage, the entire hundreds of thousands of dollars in payments you already made will be completely lost as if you never made them in the first place.

Your Credit Report History

Aside from your actual credit score, your credit report carries a running list of all your debts and how well you have performed on them. At any given time, a person looking at your score can see your total mortgage amount and how much you have paid off. Debts in good standing help your ability to get a future loan. When one debt, especially a large debt, goes into default, this is reported in detail. The credit report will show the loan was closed in a manner unsatisfactory to the lender.

This derogatory credit history will exclude you from getting a new mortgage in most situations in the coming years. In fact, it is common to have to wait three to five years after a foreclosure to even be considered for a new mortgage loan. While you may be able to get an auto loan or personal loan after foreclosure, your ability to secure a mortgage is hindered for some time.

Once you are able to secure the loan, you will see higher interest rates. You will also find government agencies are unwilling to secure your loan. Ultimately, you will end up paying a lot more over your life time to simply secure a place to live.

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