A foreclosure carries with it many financial consequences — some obvious, some more surprising. Above all, foreclosure impacts your credit, and your credit can cause you miss opportunities when buying a car, opening a business, renting an apartment, or even getting a job. Here’s what you need to know.
Foreclosures Impact Your Credit for Up to Seven Years
If you’re about to fall into foreclosure, you probably already have late payments. That’s a problem, because your credit score is about to go down even further. Foreclosures can drop your score anywhere from 85 to 160 points. The higher your credit score is before the foreclosure, the more it will drop afterward.
Now, your credit score will start improving after the foreclosure. After three or four years, you should start to see the impact of the foreclosure wear off. But it’s enough to usually drop your credit rating to a lower level.
The True Impact of a Foreclosure
With foreclosure, your credit score is impacted for the next seven years, but that’s not all that happens when you go into foreclosure. For one, most banks won’t lend you a mortgage or major loan in the few years following a foreclosure. Because foreclosures can prevent you from getting new loans or getting new credit, you could find yourself unable to get the funds needed for a medical procedure or qualify for a payment plan for other needs.
Foreclosure can also be a red flag on a background check, including one necessary for a job or for a rental. Some jobs ask whether you’re in a bad financial situation because they need to know that you aren’t vulnerable to bribery or theft. Landlords also may not look favorably on those who’ve had foreclosures because (to them) it indicates a lack of healthy financial management.
Avoiding Foreclosure to Protect Your Credit
As you can see, it’s best to avoid foreclosure altogether. But avoiding foreclosure itself takes some effort. Here are your options:
Communicating with Your Bank
Sometimes a bank will work with you if you have a good reason for being late and if you’re able to catch your account up quickly. Communicate with your bank that you may need to delay your payments, spread your payments over a longer time, refinance your account, or move your missed payments to the end of your loan. It’s up to your bank to decide whether to allow this.
Declaring bankruptcy will immediately stop the foreclosure, but that doesn’t mean it won’t start again. If you really can’t afford your home, you probably won’t be able to keep it. But if you can afford your home without your other debts in play, you should be able to keep it. Your primary home is protected during bankruptcy. For those who have many other debts (medical debts, credit card debts, and so forth), this can be a good option.
Selling Your House
Perhaps the most direct, reliable way to avoid foreclosure is to sell your house. Many go into foreclosure because their situation has changed and they can no longer afford their home. If this is your situation, it may not be a good idea to keep your house, even if you can. Selling your house means you can pay off your debts immediately and move on with your life, building a firmer financial future.
The time to do any of these things is now. The longer you wait, the more likely it is that you are going to fall into foreclosure, and you may not be able to pay off your debts in time.