I have been hearing people saying lately that foreclosure is so common now that being foreclosed really doesn’t have the same negative impact on credit and borrowing ability as it used to. Can this be true? Absolutely not. This article is directed at those folks who are considering walking away from a property they own because it has lost value – not because they are having a financial hardship, like job loss. If you choose to “give it back to the bank” you should understand the long term implications. A foreclosure will have at least 5 potential long term issues associated with it.
Credit Score Damaged
OK, it goes without saying that your credit score will be hammered. This is not an exact science and depending on what your credit report looks like now will affect the score reduction. However, you can expect your score to go down by 100 maybe 200 points or more and stay that way for several years. The foreclosure itself will stay on your credit report for a minimum of 7 years and you’ll be explaining that to creditors any time you apply for new debt.
New Loans Hard to Get
Lenders of all types – automobiles, credit cards, department stores, gas stations, installment loans, mortgages, home equity loans, every lender uses your credit score and credit report to determine your willingness to repay your debts. If you walk away from a mortgage loan every lender you currently borrow from, and those that you may apply with in the future, are going to wonder “If you didn’t repay that loan what’s stopping you from walking away from our debt?” You will not be able to obtain any mortgage financing for approximately 4 years (and only then if you have re-established good credit) and you may even have trouble leasing a place to live because landlord’s look at your credit score.
Existing Credit Cards Limit Reduced and Rates Increased
Surprising to some folks, your credit card companies review your credit report every year and even if you are paying that bill on time they can and will raise the interest rate on your credit card if your credit score goes down. They may also reduce your credit limit or change the terms on your card or even cancel and close the account.
Higher Insurance Rates
Insurance companies also use credit score as one means to determine risk and they may increase your rates if a score reduction occurs. This can impact your auto insurance, home insurance, even your health insurance!
Home Equity Loans and Second Mortgages can continue Collection Efforts
One thing that most people do not understand about foreclosure is what happens to a second lien on the house. If you have a home equity loan or a second mortgage on the property that lender will be forced to release their Lien on the home for the foreclosure to go through. However, this does not mean that they give up their legal ability to collect on the debt. The second mortgage lender will place a collection account on your credit report for the full amount of the debt and that collection account will not go away until you pay them off or settle the debt. This will make the impact of the foreclosure even worse for your credit score and ultimately you may be forced to pay the debt even after the foreclosure is completed.
The bottom line here is that the impact of a foreclosure has not changed. If anything has changed it’s the perception that letting a home go to foreclosure is somehow OK. Foreclosure will have far reaching implications on you and will continue to haunt you for years to come. If there is a course that you can follow that does not involve “giving the keys to the bank” then you should look hard and long at it because the foreclosure may seem like a good short term fix but in the long run it’s going to cost you a lot of money and heartache!