Foreclosure 101
A Comprehensive Guide to Foreclosure: Removal, Restoring Your Credit Standing & FAQs
Forclosures
A foreclosure on your credit report and what to do
Owning a home is a dream for many. Yet, when life throws curveballs, such as loss of income, medical emergencies, or unexpected expenses, homeowners might face foreclosure proceedings. This unsettling reality can drastically damage your credit standing. Nevertheless, it's possible to remedy the situation and restore your credit reputation.
Foreclosure and Its Impact on Your Credit Score
Foreclosure is a legal procedure where a lender takes control of a property due to the borrower's inability to meet mortgage obligations. It negatively impacts your credit score, challenging your ability to secure future loans or lines of credit. Your credit score will drop by a certain number of points due to the foreclosure, but the exact amount will depend on various circumstances, such as what it was before the foreclosure and the number of bad entries on your credit report.
A foreclosure can result in a reduction of 100 points or more on your credit score, as stated by FICO, for borrowers who already have a decent credit score. According to Experian, your credit score could drop by as much as 160 points if you go through with foreclosure, even if your score is already good.
In most cases, you won't lose your home to foreclosure until you've skipped at least four consecutive payments in a row (120 days of delinquency). Your credit scores will often have suffered a large reduction even before a foreclosure appears on your report.
Since missed payments have a greater impact on lowering credit scores than any other type of negative entry, your credit report will typically contain information on foreclosures for seven years after the date the foreclosure was reported.
The Foreclosure Process: A Timeline
Foreclosure doesn't happen overnight. It's a lengthy process with many steps, each providing opportunities for the borrower to make things right. If your situation was dire enough to allow the foreclosure to happen, then you may want to consider explaining what caused it to potential future lenders or employers. Sometimes, circumstances are just out of our control—a death, illness, or divorce.
The process of foreclosure generally follows these steps:
1. Missed Payments: When a homeowner fails to make a payment on time, they are technically in default on their mortgage. Most lenders offer a grace period of 10–15 days, after which they charge a late fee.
2. Default Notice: If the homeowner continues to miss payments for 30–60 days, the lender sends a "notice of default" through a letter. This notice informs the homeowner that the lender may take legal action if the mortgage is not brought current.
3. Pre-foreclosure Period: This is a crucial period where the homeowner can work out an arrangement with the lender, such as a short sale, loan modification, or repayment plan, to avoid foreclosure.
4. Notice of Foreclosure: If no arrangement has been made within 90 days of the notice of default, the lender can file a foreclosure notice with the court. The homeowner will be notified about this and given a date by which the full mortgage amount needs to be paid to avoid foreclosure.
5. Foreclosure Auction: If the homeowner fails to pay the mortgage balance or sell the property, the home will be sold at a public auction. The highest bidder will have the ability to purchase the property.
6. Post-foreclosure: If the property does not sell at auction, it becomes a part of the lender's inventory, often referred to as real estate owned (REO). At this stage, the lender can sell the property to investors through a real estate agent or in bulk.
7. Eviction: If the homeowner has not left the property after the foreclosure sale, the lender may seek a court order to evict them. Once evicted, the homeowner must find new living arrangements while the foreclosure remains on their credit report for seven years.
The Immediate Aftermath of Foreclosure: Effects on Your Credit Report
The proceedings will appear on your credit report post-foreclosure, causing a significant drop in your credit score. This black mark will linger on your credit report for seven years.
Foreclosure can have a significant impact on your credit report.
Credit Score Drop: A foreclosure can drop your credit score by 150+ points or more, depending on your previous credit score. A foreclosure can stay on your credit report for seven years.
Limited Credit: A low credit score due to foreclosure can result in limited credit, making financial recovery difficult.
Expensive Interest Rates: A low credit score due to foreclosure can result in expensive interest rates, making it harder to obtain credit.
Late Payments: Each late payment will negatively impact your credit before foreclosure begins. Most banks wait at least 90 days after failing to pay to begin foreclosure proceedings. The process can often take several months or more to be completed. It is realistic that if you have not made payments, your credit score could reflect at least six months of missed payments by the time a foreclosure is completed.
Limited Ability to Qualify for Credit: Foreclosure is a significant negative event in your credit history that can limit your ability to qualify for credit or new loans for several years afterward. Foreclosure, bankruptcy, and repossession are some of the most negative types of dings.
Tax Consequences: A foreclosure involves a property title transfer and subsequent tax assessment. Any remaining balance owed is subject to being reported to the IRS as income.
Tips for Foreclosure Removal from Your Credit Report
Despite the implications, there are steps you can take toward foreclosure removal and ultimately restoring your credit standing:
1. Review Your Credit Report and dispute the foreclosure
Obtain a copy of your credit report and scrutinize it for errors. If your foreclosure is mistakenly listed, you can dispute errors or outdated information with the credit bureaus. You can get a free copy from annualcreditreport.com.
Typical items of the tradeline to review are the open date, account number, borrower name, or other possible misreported information. Open an investigation with the credit bureau(s) that are reporting it, and wait 30 days for the investigation results. You may be asked to provide evidence or more information to determine if it will be removed.
If the foreclosure has legal issues, you may want to consult with a foreclosure attorney and attempt to get it removed from your credit report. Many times in the foreclosure process, rules, and regulations may have been ignored, which can be a good way to fight the foreclosure and submit that proof to the lender and credit bureaus.
If fraud was involved, no matter how minor it may seem, that is another way to fight the foreclosure and get it removed. You’ll need to provide documentation of what took place to prove it.
What are some common errors in foreclosure documentation that can be disputed?
When disputing a foreclosure, there may be errors in the documentation that can be challenged. Here are some common errors in foreclosure documentation that can be disputed:
Falsified foreclosure documents
Incomplete assignment of interest
Failure to follow state laws
Forged signatures on documents
Wrongful foreclosure without proper cause or in violation of mortgage servicing laws
Denying a loan modification request without proper reasoning
Lack of proper notice to the homeowner
Refusal to communicate or leave the property
Incorrect late fees charged by the servicer
It is important to review the details on each credit report before disputing a foreclosure and to provide documentation to support your claim.
Discontinued foreclosure
If you have had a discontinued foreclosure, dispute the reporting of it, as it should be removed. A discontinued foreclosure happens when the debt has been paid at the last minute or an error in reporting has occurred.
Foreclosure redeemed
A foreclosure redeemed is where you saved the property at the last minute and avoided a full foreclosure. When a homeowner successfully stops foreclosure by paying off the entire mortgage balance and legal costs incurred by the foreclosure, it is called "redeemment.
The foreclosure will then be noted on the homeowner's credit report as "redeemed"”
Foreclosure redeemed is a negative item that can appear on a credit report when a property has been seized and sold at a foreclosure auction, but the sale hasn't been recorded with the county recorder's office.
Foreclosure redeemed can stay on your credit report for up to seven years. If a homeowner finds that foreclosure redeemed is on their credit report and their property was never foreclosed, they can dispute it with the credit reporting agencies just as they would with any other questionable item.
Mortgage redemption fees do apply.
2. Rebuild Your Credit
Following a foreclosure, rebuilding your credit should be your priority. Timely bill payments, reducing your debt-to-income ratio, and keeping your credit utilization ratio low can help restore your creditworthiness over time.
3. Consult a Credit Repair Service
Expert credit repair services can provide valuable guidance to navigate the complex process of foreclosure removal. They have the knowledge and experience to dispute inaccuracies, negotiate with lenders, and employ strategies to improve your credit score. Keep in mind this type of service can be costly.
4. Refinance or Modify Your Loan
In some cases, lenders may agree to modify the terms of your loan, which can help you avoid foreclosure. Alternatively, refinancing your loan with better terms and rates can make repayments more manageable.
How long does a foreclosure stay on my credit report?
A foreclosure stays on your credit report for seven years from the date of the first missed payment that led to it. After that period, the foreclosure mark should automatically fall off your reports. However, its impact on your credit score will likely affect you long-term. The impact of a foreclosure on your credit score will depend on your credit standing before the negative mark hits. Generally, you can expect a foreclosure to drop your score by 100 or more points.
The damage from having a foreclosure on your credit report lessens as time passes, and you can start fixing your credit scores and building a positive credit history immediately after a foreclosure by decreasing your debt ratio and paying all other accounts on time. A foreclosure can harm future rental or home-buying opportunities.
Note: This information is for educational purposes only and should not be considered legal advice. Consult with a financial advisor or legal expert for personalized advice.
What are the top 10 reasons people default on their mortgages?
Foreclosure typically occurs when a homeowner can no longer make their mortgage payments. The reasons can be numerous and varied and involve many circumstances.
1. Unemployment or Loss of Income: The loss of a job or significant income can make it difficult for homeowners to keep up with their mortgage payments. This is one of the most common causes of foreclosure.
2. Medical Emergencies: High medical expenses due to a serious illness or injury can create financial hardship, making it hard for homeowners to meet their mortgage obligations.
3. Divorce: Divorce can significantly change financial circumstances, making it challenging for a single party to handle the mortgage payments alone.
4. Adjustable Rate Mortgage (ARM) Reset: Homeowners with adjustable rate mortgages may face skyrocketing payments when the interest rate increases. This can suddenly make the payments unaffordable.
5. Death: The death of a spouse or significant family member can lead to a loss of income, which can make mortgage payments unmanageable.
6. Debt Overload: Overwhelming debt from credit cards or loans can leave homeowners with little money to cover their mortgage.
7. Bad Budgeting or Overspending: A lack of financial discipline can lead to overspending, leaving insufficient funds to cover mortgage payments.
8. Natural Disasters: Natural disasters that damage or destroy homes can lead to foreclosure. This is especially true if the homeowner doesn't have adequate insurance coverage.
9. Negative Equity: In cases where the home's value falls (sometimes due to wider economic conditions), homeowners may find themselves "underwater" on their mortgage — owing more than the property is worth. This can lead to foreclosure, particularly if the homeowner needs to sell the home.
10. Predatory Lending Practices: Some homeowners may fall victim to predatory lending practices, where unscrupulous lenders impose unfair and abusive loan terms on borrowers.
What is a short sale, and is it just as bad as a foreclosure?
A real estate transaction is referred to as a short sale if the lender agrees to accept a price lower than the amount owed by the current homeowner on their mortgage. In most cases, it is a sign that the homeowner is experiencing financial difficulties and needs to sell the property before the lender takes possession of it through foreclosure.
When a homeowner is in financial difficulties and has missed one or more mortgage payments, and the possibility of foreclosure proceedings is looming, a short sale may be an option for the homeowner. The mortgage lender must provide prior approval for the short sale, and the previous owner may be obliged to pay the shortfall, or the debt may be forgiven.
The short sale must be approved in advance by the mortgage lender. Prospective homeowners may have the opportunity to purchase a home at a lower price than they would pay in a conventional transaction if they purchase the property through a short sale.
The lender needs to be on board with the short sale, and in most cases, this requires a certain level of resilience and patience, in addition to a significant bit of luck. Short sales were relatively common between 2008 and 2012, but they are far less common in the robust housing market of today.
A short sale listed on your credit reports is preferred to foreclosure, but both are negative and remain for 7 years. If you have no options for getting a short sale or foreclosure removed, you may want to consider inserting a consumer statement to explain any circumstances that justify the default, like a death, illness, or fraud.
Can I buy property if I have a short sale or foreclosure on my credit?
You can apply for a mortgage, as nothing stops you, but you’ll likely face approval issues. Most lenders will consider you a risky borrower if you have an existing foreclosure or short sale on your credit report.
What are some consequences of a wrongful foreclosure?
Wrongful foreclosure can have serious consequences for homeowners.
Loss of property: Wrongful foreclosure can result in the loss of a homeowner's property
Damage to credit score: Foreclosure can have a long-term adverse effect on a homeowner's credit score
Wrongful foreclosure can further damage a homeowner's credit score
Compensation for damages: Damages available to a borrower in a wrongful foreclosure action include compensation for the detriment caused, which is measured by the value of the property
Legal fees: If a borrower wins a wrongful foreclosure lawsuit, the lender may have to pay the borrower's legal fees
Punitive damages: If there is evidence that the wrongful foreclosure was initiated intentionally out of malice or fraud, then the borrower could receive punitive damages
Emotional distress: Wrongful foreclosure can cause emotional distress for homeowners
Financial burden: Foreclosure can result in a financial burden for homeowners, including fees and penalties. Wrongful foreclosure can further exacerbate this burden
It is important for homeowners to check their mortgage statements carefully and to seek legal help if they suspect wrongful foreclosure.
How does a deed in lieu affect my credit?
An arrangement between a homeowner and a mortgage lender that results in the homeowner relinquishing all homeownership rights to the lender and, in many situations, the lender forgiving the homeowner's outstanding debt is known as a "deed in lieu of foreclosure."
Even though a deed in lieu of foreclosure will remain on your credit report for four years, it is possible that it will not have the same negative impact on your credit score as a foreclosure, which can remain on your credit report for up to seven years. Deeds in lieu of foreclosure will still negatively influence your credit score and make it more difficult to get a mortgage in the future, but it’s not as negative as a foreclosure.
The terms and conditions of a deed in lieu of foreclosure are negotiable, and the terms and conditions that are agreed upon will depend on each party's bargaining position. There is a possibility that the lender for your reverse mortgage will not agree to accept your deed in lieu of foreclosure.
Before committing to a deed in lieu of foreclosure, it is crucial to understand how it may affect both your credit and your ability to purchase another house in the future.
What is a nonqualified mortgage?
The term "non-qualified mortgage" (often abbreviated "non-QM") refers to a specific kind of mortgage loan that makes it possible for borrowers who might not qualify for a conventional mortgage to obtain a house loan. Mortgages that do not satisfy the criteria established by the Consumer Financial Protection Bureau (CFPB) to be categorized as qualified mortgages are referred to as non-QM loans.
Non-QM loans often have more flexible qualification standards and use alternate means of income verification, such as bank statements or assets as income, instead of the traditional income verification required for most loans.
Non-QM loans are not insured or backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), Fannie Mae, or Freddie Mac.
Borrowers with low credit scores, high debt-to-income ratios, income that fluctuates from month to month, or who are self-employed and have difficulty providing tax documents to prove their income may be good candidates for non-QM loans. Other borrowers who may benefit from non-QM loans include those with incomes that vary from month to month.
If a foreclosure prevents you from qualifying for another mortgage loan, you can take the Non-QM route if you have plenty of assets or cash on hand to secure the loan adequately enough so that there is little risk.
