Buying a home is no easy feat. Neither is paying it off. If enough consumers confidently plunk down cash for a home, economists cheer. On the flipside, foreclosure rates are also commonly used as a barometer for the country's economic health and recovery. But what does foreclosure mean on a personal level? Read on to learn more about the foreclosure process and how a foreclosed home could impact your credit health.
What is foreclosure?
When most people buy a home, they cannot afford to do so in cash, so they take out a mortgage and the home is used as collateral to secure the loan. If you fall behind on your mortgage payments, foreclosure is the legal process by which a lender may attempt to force a sale of the home used as collateral to make up for its financial losses.
Please note that the specific processes and laws regarding foreclosure vary from state to state, so if you're facing foreclosure, be sure to consult local resources and the regulations applicable to your state. The Consumer Financial Protection Bureau has compiled a guide that you may find helpful, including a number to connect you with U.S. Department of Housing and Urban Development-approved counselors. You could also reach out to nonprofits like NeighborWorks America for additional guidance and information.
How can foreclosure affect my credit score?
A foreclosure is considered a public record and is listed on your credit report alongside other public records, such as a bankruptcy or tax lien. Foreclosures are a serious matter that will cause a major drop in your credit score. TransUnion, one of the three major credit bureaus, says that your score could drop over 200 points. While it is impossible to predict exactly how much your score will drop, the impact can clearly be drastic.
Your Future After Foreclosure
A foreclosure will typically remain on your credit report for seven years from the date filed. If you have a foreclosure on your credit report, it's likely you'll pay more for insurance and you may even have a hard time finding a new place to live. That's why it's important to start working on your credit health before the foreclosure is even removed from your credit report. Steadily follow through on whatever payments you can, and consider opening a secured credit card if your existing creditors close your credit cards after the foreclosure occurs.
Having a foreclosure on your report probably won't prevent you from ever obtaining a mortgage again, but you may need to wait a while until you're able to qualify or get the rates you're hoping for. Keep an eye on your overall financial health, and practice good habits in the meantime.
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