In some cases, it may look as if foreclosure is the only option you have when you fall behind on bills or if unexpected circumstances change your financial situation. For some homeowners, it may seem as though “walking away” from their mortgage is the best solution to a difficult situation. However, before you allow foreclosure on your home to proceed, it is important to consider how the relationship between your credit and your mortgage can affect you in the future.
Credit and Mortgages: The Consequences of Foreclosure
Because your credit rating and mortgage loan are connected, going through a foreclosure will be reflected in your credit report, which acts as a guide to your financial history. Thus, a foreclosure alters the way you are seen by creditors and lenders.
To start with, since you haven’t been making your mortgage payments on time (which is what led to the foreclosure) your credit score may already be dropping. Once the foreclosure process is complete, your credit score could fall even further ― as much as 200 to 300 points at once.
Above all, you must remember that a mortgage loan is a type of credit. Because of this, your credit and mortgage behaviors are influenced by each other. If a bank forecloses on your home, it means that you did not meet your debt obligation and the result is a lower credit score. In the future, this relationship between your credit and your mortgage can limit your ability to buy a house.
Credit and Mortgages: After Foreclosure
A foreclosure can remain on your credit report for as many as seven years. This means that future mortgage lenders will see that you’ve already defaulted on a mortgage if you apply for a new one. Having a bad credit and mortgage record can lead to your loan application being denied the next time around. However, if you’re approved, there’s a good chance that you will have to pay a higher interest rate to help reduce the lender’s risk. The increased likelihood that you may default again can cost you thousands of extra dollars in interest over the life of the loan. [See related article “What to Do If Your Mortgage Application Is Denied”]
Despite your credit and mortgage being closely connected, it is possible to buy another home after foreclosure ― although you should note that you will probably have to wait two or three years to even be considered. If you work diligently to improve your credit score, your mortgage prospects will improve dramatically within a few years.
Remember that a foreclosure will not lock you out of the housing market forever, but it will be more difficult for you to secure another mortgage loan. By paying attention to the relationship between your credit and your mortgage, you can work on putting that foreclosure behind you and moving on.