A bank foreclosing on your home is a serious matter, and not just because you would lose your house. A foreclosure also goes on your credit report, which can have a negative impact on your credit score and make it very difficult to get another mortgage or a loan in the future.
U.S. News and World Report explains why a foreclosure damages your credit and how you might struggle with getting another loan for years after the foreclosure.
The impact of foreclosure on credit
Banks initiate foreclosures because their borrowers fail to make their mortgage payments on time. Failing to pay back a loan can cause credit scores to decrease, and missed mortgage payments are no exception. However, a foreclosure can result in a steeper credit decline. This is because a foreclosure is the final and most serious action after multiple missed payments.
In addition, the missed payments leading up to the foreclosure count separately from the foreclosure itself, so your credit score may already have dropped prior to the foreclosure. Collectively, your missed payments and foreclosure can do a lot of damage to your credit.
How long foreclosure stays on your report
A foreclosure generally stays on your credit report for a seven-year period. The seven years usually start from the date when you first failed to make a payment. After this period has elapsed, the credit agencies should automatically take the foreclosure from any of your credit reports.
The difficulty of getting another loan
A foreclosure on your credit report can cause lenders to consider you a financial risk. In fact, many banks and government institutions have a waiting period following foreclosure to be eligible for a loan again. It is possible, however, to shorten some of these periods if you show your foreclosure occurred due to a hardship like losing your job or incurring expensive medical bills.
Avoiding foreclosure is possible
Fortunately, there are options that may prevent a bank from foreclosing on your home. You may work out an arrangement with your lender to lower mortgage payments and pay back missed amounts. Florida also has laws governing foreclosure that could help you fight for your home.
Filing for bankruptcy might also avoid the loss of your house, though bankruptcy may also negatively affect your credit. Look for the options that could best benefit your situation.