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Foreclosure – Kiss of Death to Credit Scores

Stop and consider the single most harmful events for your credit.  There is of course a bankruptcy, then a repossession of a vehicle, and there is finally foreclosure.  These three items on your credit are worse than a black kiss of death and can essentially keep you from buying a home, a car, opening a bank account or getting a credit card.  While it may seem completely unfair that a foreclosure has such a huge impact on your credit, consider the risk that is associated with lending money to someone who has been in foreclosure.

Imagine that you are going into a bank to take out a car loan and you have a foreclosure or a lapse in paying your mortgage in your credit history.  Consider the position of a potential lender: they are looking at you as a huge risk, especially if you are unable to even pay your mortgage payment.  Most people consider their home to be the first priority that they have.  Which means, if you did not even pay your mortgage payment you likely will not pay them either.  While there are always situations that appear that make it very difficult to handle all of your bills like you would want to, it is important to understand that not paying your bills does cast you in a negative light when it comes to potential lenders.

While this may seem immensely unfair especially to someone who has not been in foreclosure in many years, the facts remain that you are still held accountable for the foreclosure for approximately 10 years from the date it occurred in your credit file.  This means that for 10 years following the foreclosure you can expect to pay exorbitant interest rates on anything that you purchase on credit, if you are even approved at all. 

As you can imagine, keeping a foreclosure off of your credit is the best way to really avoid the potential problems and complications but not everyone has the ability to really do this.  Of course, situations are always different for everyone and while one person may be able to pay all of their bills each month, another person may struggle to only pay a portion of their bills each month.  Keeping your budget in check is very important to ensure that you keep your credit under control as much as possible. 

The fact that a credit score is impacted so much by a foreclosure is often surprising to many people, yet consider just how important your credit score was to even receive the mortgage in the first place.  Likely, the lender pulled your credit file at least two times before you officially closed, and you probably had to prove your income, as well as justify any negative marks that were on your file.  Once you have been through a foreclosure process you are considered a huge risk and lenders are quite leery to do business with you without requiring huge down payments. 

Losing your home to foreclosure can have such a huge impact on your credit score that it can drop your normally beautiful 700+ score down to less than 300.  This is a huge hit that without time and additional positive marks on your credit can harm you for a very long time.  In the past, a foreclosure was not as damaging to a credit score.  However, the days of purchasing a new home only a year after a foreclosure are long gone. 

Lenders, regardless of the type of lender whether mortgage, vehicle or credit cards, are now highly reluctant to give any new loans or lines of credit following any credit problems.  The biggest problems that they worry the most about are foreclosures, repossessions, and bankruptcy.  Doing your absolute best to avoid these situations is the best option that you have to help save your credit score as well as keep your home if you ever find yourself facing a potential foreclosure.

Never just wait and see what happens.  Always work with your lender to get the best results possible.  Keeping your credit as clean as possible, will help ensure that you are not left worrying about how to get financing for a home.  While credit standards are likely to lessen up once the real estate market improves, many lenders are going to remember the problems that are associated with this slump in the real estate market for many years and the effects will likely be remembered for a very long time.

Working to keep your credit as clean as possible will help ensure that you are always able to be approved for a mortgage.  You are not likely to have much success being approved for a mortgage once you have had a foreclosure added to your credit file, and once the mark is there, it will be a very long time before it is removed.

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The information found on this site is not intended to be legal advice. The foreclosure process is highly case specific and laws vary throughout the United States. Please seek professional legal counsel before entering into any contract regarding any real property or stopping the foreclosure on any real property. By using this site you consent to the terms posted here.