People often wonder if foreclosure will hurt their credit rating score. This topic is an important one because if you don't have the facts, taking the wrong step may impact your future finances for a very long time. Some people believe once you complete the foreclosure process you're no longer responsible for the debt yet, all of us have heard others state this is not true. We're going to get to the bottom of this mystery and get a clear understanding of the facts. If you're facing a foreclosure situation, you will be better prepared knowing what actions to take.
After a home has fully completed the foreclosure process, the house now belongs to the bank. Some people mistakenly think the bank takes the home back when in fact the bank did not have possession of the home initially. The distinction needs to be very clear because the title on the deed is significant in legal terms and is essential when it comes to credit scores. In some cases, homeowners can no longer afford their home and abandon it even after their loan modification is denied. While in other situations homeowners may voluntarily sign the deed over to the bank. In either case, the bank has now officially seized the property and has foreclosed. There is a very distinct difference, and you'll see why in a moment
A foreclosure and a short sale can impact your credit score in negative ways but, the foreclosure process can have a more significant impact on your credit score. The main reason is with a short sale you are working with your bank. With a foreclosure in many instances, the bank is excluded and kept out of the loop. The bank's primary business is not in the Housing Industry. They're focused on the lending aspects. Furthermore, it's very inconvenient for the bank especially when it comes to recovering money for the home. Banks do not like to deal with individual cases, but instead, attempt to regain their money using bulk auctions. In a short sale situation, a Bank is willing to forgive the debt because you are working alongside the bank. The bank in most cases will go after you to reclaim the lost payments.
Surprisingly the foreclosure process can impact your credit score differently depending on where your credit score sits beforehand. According to the FICO mortgage scoring system. If your credit score is at 675, you will only lose between 90 and 110 points. Alternatively, if your score is just under 800, you will fall between 145 and 170 points. So, a person with a higher credit rating initially will need to think very strategically about the course of action they're going to take. The higher your initial score, the more you may be impacted by the foreclosure process. The main reason for the discrepancy is the bank will equally deny people with lower credit scores according to policies and procedures.
A foreclosure will stay on your record for a considerable amount of time. The standard time frame for foreclosure is proximately seven years. There can be a slight variation of about 180 days depending on the date of the last payment and when the courts finalize the paperwork. Your credit score can increase gradually over time, but you won't see a substantial increase until after the seven-year period is up. People that have experienced foreclosure and want to pursue traditional financing in the future will need to pay higher interest rates of approx 2% and, will usually require a down payment of 20%.
In conclusion, the foreclosure process is undoubtedly harsher on your credit score than a short sale. You will see the impact on your credit for seven years. The higher the credit score beforehand, the more you will drop in points. The bank can also go after you for the lost revenue.