Foreclosures are scary business. The prospect of losing one’s home can seem like the death of the American Dream to a family. And among all the paperwork, tense calls, late nights, and moving boxes, thinking about your credit score can get lost like a child’s bouncy-ball under the fridge. But let us reach our arm under and retrieve that ball, though, and see just how big a chunk a foreclosure can take out of it.
Your credit score will determine whether you can get any kind of loan, whether it’s a stop-gap infusion to get you through the next few months, or if you want to try to get a home ever again. Turns out, a foreclosure can chew off up to a solid 300 points off your score. So how exactly does a foreclosure get your score all the way down there into sub-prime territory?
Obviously, each case is different and so it’s difficult to nail down an exact number, but many experts agree that a foreclosure alone will take a bite out of your score that can range anywhere between 80 and 175 points in size. But let’s remember that that action will likely only come after repeated non-payments, each of which count as negative information on your report. So your score will probably drop considerably both when you first go 30 days without a payment, and then fall 90 days or more behind. In both cases, your score can drop by more than 100 points even if you have a sterling borrowing history.
Of those two time periods, lenders tend to view 90-day delinquencies far more harshly. While it’s not especially hard to fall 30 days behind on payments due to minor forgetfulness or cash-flow issues, blanking on a whole three months worth of due dates warns lenders that you have far bigger financial problems. Normally borrowers over 90 days past due on their balance have a poor track record of being able to catch up.
So even if you had good credit before your financial troubles hit, you can expect your credit rating to fall by as much as 300 points throughout the few months that led to your home being foreclosed upon. It’s something to think about if you’re evaluating your options, or even considering what’s known as “strategic default.” That’s basically a fancy way of saying “not paying your mortgage bills on purpose and letting the bank take it,” often because a home’s value has fallen well below the total amount of the mortgage.
However, you might still be able to retain at least a little bit of your credit rating by doing as much as you can to keep current on your other accounts, such as your credit cards, and doing all you can to keep your outstanding balances as low as possible. Of course, even if your management of other accounts is perfect, you will likely have difficulty qualifying for any type of credit for some time, but all hope is not necessarily lost. Eventually, some day, someone may lend to you again, but it may be a good while before they will hand over to you, on credit, the door keys to a new home.
Image: Lord Biro, via Flickr