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How Foreclosures Affect Credit
Having a foreclosure on your credit report can have a major negative impact on your credit score and affect your ability to obtain credit or new loans for several years.
What you should know about foreclosure and how it may impact your credit is provided here.
A foreclosure is what?
When a borrower defaults on their loan payments, a mortgage lender may seize control of the property. This is known as foreclosure. Legally, the lender has the right to seize the assets in order to recoup as much of the loan balance as feasible.
The following information on foreclosures and how they may impact your credit is provided.
How long is a foreclosure recorded on a credit report?
Within a month or two of the lenders starting the foreclosure process, a foreclosure entry usually appears on your credit report. For seven years from the date of the first missed payment that caused the foreclosure, the entry remains on your credit record. It is then removed from your report.
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Effect of Foreclosures
- Although foreclosures have a significant negative impact on credit scores, the exact number of points they will lower your score relies on a variety of criteria, just like with any adverse credit record entries. These consist of your credit score prior to foreclosure and the quantity of unfavorable information on your credit record.
Usually, foreclosures don't happen until four consecutive missed payments (120 days of delinquency). Missed payments lower credit scores more than any other bad information, so you will often see a large decline in your credit scores even before a foreclosure shows up on your credit report. (Missed payments on other debts have a compounding effect if you are also doing so.)
Lenders' Perspective of a Foreclosure
The bad perception that many lenders have of foreclosures is maybe more important than how it affects credit ratings. There is no established guideline for how a lender will handle a foreclosure in terms of these factors; each lender has its own lending standards. But it's safe to assume that all lenders view foreclosure as the second-worst possible negative occurrence in your credit history after bankruptcy. If an applicant fits the remainder of the loan requirements, some creditors may overlook foreclosures that are several years old, while others won't even consider them at all.
Can a foreclosure be removed?
Before its expiration date, which is seven years from the date of the initial missed loan payment, a genuine foreclosure entry on your credit report cannot be deleted. The entry ought to automatically disappear from your credit record at that point. After that date, if it still appears on your record, or in the extremely uncommon event that a foreclosure that never occurred is listed on your credit report, you can use the credit report dispute process to prove the error and have your credit reports updated.
Even though a foreclosure is a challenging process that can negatively affect your credit, with time and excellent credit habits, you may be able to bounce back and eventually purchase another home on your own.
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