A foreclosure occurs when a homeowner can't make a full payment (principal plus interest) on the mortgage. When this happens, the lender can seize the property, evict the homeowner, and then sell the property to try and recoup their losses.
When you realize you can't pay your mortgage bill, the Consumer Financial Protection Bureau (CFPB) recommends that you contact your lender right away. There might be options you can consider. The longer you wait, the less likely you will be able to work anything out with your lender.
With a mortgage, your account is in default one month after you miss a payment. You generally have about three to six months after the missed payment before the lender begins the foreclosure process. The lender often adds fees for the missed payments, so this can make it even more difficult for a homeowner to get caught up on payments.
How Long Does it Stay on Your Credit Reports?
A foreclosure stays on your credit reports for seven years. Keep track of the time period so you know when the item will be removed from your reports. If the foreclosure isn't removed after seven years, then you should contact the bureaus and ask for removal.
Often, someone who faces a foreclosure wonders if they're better off declaring bankruptcy. A bankruptcy can have a much bigger negative impact on your score because there are many accounts involved. With a foreclosure, only one account – your mortgage – is affected, so the damage to your credit is more contained.
How Much Does it Impact Your Score?
A foreclosure is considered a highly negative event. It drags down your credit score a significant amount. But there is some good news. The negative impact of the foreclosure lessens as time goes by, especially after you hit the two-year mark. So hang in there and you will be able to rebuild your credit with time.
You can check your credit score for free with LendingTree's Free Credit Score. Your score will not be dinged during this process.
Legal Issues to Consider
If the lender sells the property and the sales amount is less than the balance owed on the mortgage, then the difference is called a "deficiency." As if things weren't bad enough for you, the lender may try to collect this amount from you. Or, the lender might decide to "forgive" the debt. If the latter happens, you could receive a 1099-C statement, which is used to report Cancellation of Debt . The form will show the amount of debt that was discharged and you must declare it as income. You might be required to pay taxes on it.
The lender might be able to seek a legal remedy for the deficiency amount, which could result in a judgment if you lose. Typically, these judgments involve liens against personal property, wage garnishments, and more. But whether or not this is an option at all depends on what state you live in.
There are states that don't allow lenders to sue for a deficiency judgment. But even if the state you live in allows the lawsuit, there are more rules a lender must follow and these rules vary by state. As you can see, the laws are very complex and you will need to consult with an attorney if you find yourself in this situation.
What are Foreclosure Rescue Scams?
It's never a good feeling to have a negative item on your credit report, but a foreclosure also carries with it a lot of emotional pain. You've lost your home. This can make you vulnerable to scam artists who say they can help you keep your house.
According to the CFPB, foreclosure rescue scams can take many forms. Some common ones involve "loan modification specialists." These scammers might ask for a deposit and then ask for larger amounts after that. They'll tell you they will talk to your mortgage company and modify your loan to prevent foreclosure.
What should you be on the lookout for? Here are some warning signs:
- Guarantees they can stop your foreclosure.
- Asks for a fee in advance.
- Guarantees they can find mistakes in your loan agreement, which will force the lender to change or even cancel the loan (not true).
- Encourages you to cut off communication with your mortgage company.
If you have been a victim of a foreclosure scam artist, contact the Federal Trade Commission, the Better Business Bureau, or your state Attorney General's office and report it.
How to Fix Your Credit
As already mentioned, the impact on your score will decrease with time. But in the meanwhile, do your best to pay all of your bills on time. Make sure the foreclosure is the only negative item on your report.
And if you have credit card debt, pay it down as quickly as possible. Keeping low balances that you pay in full by the due date improve your credit score. If you don't currently have credit cards, it may be difficult to get one right after your foreclosure. One way to go when your score rises a little, is to apply for a secured credit card. Secured cards can help you get your foot back into the credit game so you can rebuild your credit history.