Foreclosure and Credit

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Credit after foreclosure

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While the way that credit functions and the manner in which credit scores are calculated can be very complex, one thing is for certain: a foreclosure can greatly affect credit and limit a person's ability to borrow money for future endeavors.

The first important thing to know is that foreclosure is a matter of public record and is available information to anyone looking for it. Furthermore, a foreclosure will show on an individual's credit for no less than seven years in most instances, so it is quite obvious that avoiding foreclosure is in one's best interest.

If you are foreclosed on, it will be EXTREMELY hard to get a mortgage as long as the foreclosure is on your credit report. There is nothing mortgage lenders like to see less than a foreclosure.

Even if the house is not actually foreclosed on, it can create credit problems even if a lender files suit, so it is in everyone's best interest to take care of the situation as soon as possible.

There are several options available to those facing foreclosure and they should each be carefully considered before making a decision. Among these are options are a deed in lieu of foreclosure, a short sale, listing the property with a Realtor to try and sell it before the foreclosure, listing it on your own, bankruptcy, a loan forbearance, loan modifications or refinancing.

A deed in lieu of foreclosure is an agreement with the lender in which the borrower hands over the deed to the property in return for having the debt of the mortgage satisfied. This may still affect credit, but is usually a better option than foreclosure when it is available.

A short sale can also affect credit and should be avoided when possible, but can be a good alternative in the face of foreclosure. A short sale generally involves a compromise with the lender where the lender will take a smaller amount than what is due in payment for the loan.

Alternatively, forbearance can give the property owner extra time to gather payment or take care or what is due. If either of these situations is an option, it is always important to contact the lender communicate any intentions to them so that the lender is aware of what is happening and can be involved in the process.

Most lenders would prefer to agree upon a short sale or forbearance because a foreclosure tends to be a much costlier option for the lender.

The best option available where credit is concerned is to sell the house before the foreclosure takes place. This can take on a variety of forms, but finding an experienced Realtor is what is most likely to get the job done in time.

Refinancing the home is one way to possibly stay in the home and keep it from being foreclosed on, but this may be difficult to do if a notice of default has already been received.

Once the credit bureaus know about that notice of default, a lender may be less willing to refinance. Refinancing would certainly be a better way to save credit, though.

One last option available that would not do as much damage to credit is getting the lender to agree to loan modifications. This simply means that the lender will modify the terms of the loan making it more affordable for the borrower by changing interest rates and payment requirements. The big advantages for the borrower are that this may not affect credit and the property won't be lost.

In any case, it is always best to communicate with the lender and consider all options because some may not be available and some may cause credit scores to take a bigger hit than is necessary.

Stopping the foreclosure before it happens is the best way to save your credit. Our staff has helped thousands of people improve their credit. Not all your foreclosure avoidance options will save your credit. Call us for a FREE Situation Analysis to help you determine which ones are best for you.