Despite reported upswings in the housing market, foreclosures continue to be a huge problem for residents of the US. In March of 2013 alone, 1 in every 859 housing units in the US received a foreclosure filing. The RealtyTrac database lists over 1.4 million homes that are currently in foreclosure – that’s well over a million families struggling with the impossible situation of losing their homes.
No matter the circumstances that put you there, having to deal with a foreclosure is one of the most stressful situations anyone can imagine. The stress of losing a home is only compounded by the damage foreclosures do to your ability to get back on your feet after a financial setback. After the foreclosure is over with, the damage to your finances continues in the form of lower credit scores and higher costs for everything from loans to insurance – and that’s assuming you can still qualify.
How Foreclosures Impact Your Credit
There used to be a time in which the damage of foreclosures could be reduced by completing a short sale or a deed-in-lieu of foreclosure rather than going through with an “official” foreclosure proceeding. However, the credit bureaus have since started penalizing all three of these situations identically. The only potential benefit to a short sale or deed-in-lieu is the possibility of qualifying for a new mortgage shortly thereafter. However, the steep declines in your credit scores may make this impossible.
In terms of credit score penalties, you can expect to lose anywhere from 85-160 points on your credit score when the foreclosure first hits your reports. If you had good credit to start with, expect a much sharper drop than if your credit was already poor or average. This means that you will not be able to qualify for new credit immediately after a foreclosure and you may also see the interest rates on your current credit cards rise as a result of the drop.
In terms of buying a new house after foreclosure, you won’t be able to qualify for a new mortgage for at least 2 years and possibly longer. This is the case even if you have the financial means to pay for a less expensive home. Once you do qualify for a mortgage, expect to have to pay more in interest and fees. Additionally, you’ll most likely be expected to put a much higher amount towards the down payment – somewhere in the area of 20% or more.
Other Ways Foreclosures Can Cost You
Many people don’t realize the many different ways your credit score impacts your everyday life. Along with access to loans or credit cards, your credit score is often used:
- As part of the hiring process – to weed out candidates with low scores
- To set insurance rates – to charge higher rates for poor credit or to disqualify people entirely
- To get approval for utilities – to charge hefty deposit fees to establish service
- For other services – for services such as cable and internet, you may not even qualify for service if your score is too low
It is also very common for landlords to use credit reports when screening potential renters. This can make it more difficult to find a good home or apartment in a safe neighborhood as landlords immediately weed out people with low credit scores as a potential risk for nonpayment of rent.
The fact that foreclosure can make it even more difficult to find a place to live is something many people don’t find out until they are in the process of trying to find a home or an apartment once their house has been foreclosed.
When you add this to the large deposits that will likely be required to establish necessities such as electricity, water, and garbage collection it becomes even more difficult to start over and begin rebuilding your life after foreclosure.
Getting Foreclosures Off of Your Credit Report
While the mortgage crisis still has its grip on many families, foreclosures can be removed from your credit reports in many instances. The Fair Credit Reporting Act (FCRA) applies to mortgage payments, even when the home has been subject to foreclosure.
The mistakes made by lenders have been well documented in foreclosure cases, with some banks even having to pay restitution to people whose foreclosures were mismanaged. Because of the many errors that have often occurred in foreclosure cases, including the “rubber stamping” of foreclosure documents and lack of proper procedure, it may be possible to have your foreclosure removed from your credit report permanently.
Another common way that foreclosures are removed from credit reports is through a lack of available records. This most often occurs when the bank who owned the mortgage is no longer in business. In many instances, mortgages and foreclosures were sold from one bank to the next, leaving a snarl of paperwork that made it impossible for people to pay their mortgage bills on time.
These sales also made it difficult for some banks to keep accurate records, and if the bank listed on your credit report is no longer in business, they will not be able to verify the foreclosure. Any information on your credit file that cannot be verified has to be removed.
Removing foreclosures requires filing separate disputes with all three credit bureaus. Because of the way the credit bureaus work, you have to word your disputes carefully in order to avoid having your dispute deemed “frivolous”. While the FCRA offers protections for consumers, credit bureaus have the right to ignore anyone that they feel is abusing the law.
The credit bureaus decide whether or not a dispute is frivolous solely on the basis of your communication and any proof that you can provide. This is one of the reasons that many people look for professional assistance when it comes to repairing their credit and removing foreclosures.
If you need to remove a foreclosure from your credit report, talk to us. We will provide you with the information you need to make an informed decision without cost or obligation, and if you decide to work with one of our experts, we can get started right away.
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