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Credit Mishaps

The Foreclosure Process and What To Do Afterwards

A foreclosure is one of the most credit-damaging events that can ever appear in your credit history. What's even worse is that foreclosures stay on your credit report for at least seven years. No, a foreclosure won't ruin your credit rating forever. But having a foreclosure on your credit report will lower your credit score until you're able to re-establish good credit — and that takes time.
Unfortunately, a low credit score virtually guarantees that you will pay higher interest rates on home and auto loans, credit cards or other forms of credit. How much more will you pay? Experts say that a person with a low credit score, say, below 600, will likely receive mortgage interests rates that are nearly 3% higher than someone with a score above 700. In a worst case, you may be denied credit altogether.
There has been a lot of talk about foreclosure trends in the news especially in recent years. With many Americans spending well beyond their means, foreclosures have become a common part of the overall real estate landscape. Since a foreclosure will lower your credit score, you need to know the facts about bank foreclosures if you plan to buy a home, or if you currently own a home and foresee any problems making the payments.

What exactly is a bank foreclosure?

A bank foreclosure occurs when a bank claims ownership of a property because the property owner has fallen behind on or stopped making mortgage payments. Generally, after three missed payments, banks will start the foreclosure process by sending you written notification that you are in default — or failing to meet the payment obligations of the mortgage agreement. Unless you pay the overdue amount owed, the property will be sold at public auction. 

If you're interested in finding out about foreclosure laws in your state, please see our directory of Foreclosure Laws for All 50 States.

One important point to remember: In general, banks want to avoid foreclosures as much as homeowners do. The reason is simple: Banks make more money when a mortgage is successfully paid off. In fact, most banks will often try to avoid a foreclosure, if possible.

Can a foreclosure be deleted from your credit report history?

If foreclosure proceedings are filed against you, there is no legitimate way to have that information removed from your credit report — at least not for seven years. After that, the foreclosure can only be removed from your credit report, which is your official credit history, after you send a written request to the three major credit reporting bureaus.

What to do after a Foreclosure

Foreclosure can be a dark cloud hanging over your credit score for years, especially if you want to purchase a home. However, if you have a poor credit score because of foreclosure, you don't have to be stuck with a bad credit mortgage with an unreasonably high interest rate.
During the first two years after foreclosure, your options will be limited when shopping for a new mortgage, as lenders generally won't approve a loan. However, this gives you the time to go into a plan of action.  Homeownership is just around the corner!

Steps for damage repair
There are things you can do to reverse a bad credit rating.

Ultimately, lenders want to see a dependable track record.
Purchasing a new home will probably mean saving for a down payment all over again. And mortgage interest rates following a foreclosure may be outrageously inflated, up to three or four percentage points above current rates. However, the more you can put toward a down payment, the better your mortgage terms will be.
The key to lowering your mortgage interest rate, therefore, is to increase your savings rate. In order to do this, patience is key. Draft a budget that includes saving a portion of your monthly income into a savings account.
Since mortgage lenders review the last two years of your credit history, it's a good idea to document in writing why you have a foreclosure on your credit report. Review your credit each year, making sure there are no inaccuracies.  Keep improving your credit month, by month.

Be a smart shopper
Ultimately, savvy shopping is the key to a new loan. Compare prices online to get the best deal.  Don’t get caught up in a “fix-it quick” scheme.  Time is on your side.
Keep your spending in check, and you can secure a credit loan despite the foreclosure in your credit history. Once you do, the clouds will disappear, allowing the sun to shine brightly on your home.

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