How Does Foreclosure Affect Your Credit Score?
Foreclosure is a highly unfortunate event that forces homeowners to lose their homes after defaulting on their mortgages. Foreclosures are a real risk to those who are struggling to make their mortgage payments. If a homeowner is three months overdue on their mortgage payments, they face the real risk of having their home repossessed by their lender.
What is Foreclosure?
Foreclosure is a process of repossessing a property after a borrower misses their mortgage payments. In Canada, it is more popular in Nova Scotia, Quebec, Manitoba, Saskatchewan, Alberta, and British Columbia. In all other provinces, Power of Sale is usually opted for instead.
Lenders don’t want to have to deal with a foreclosure and will often try to seek other options before taking this route. This is because foreclosure takes a long time to complete and is often a tedious task.
Foreclosures typically take anywhere from 6 to 10 months to complete. It’s in the best interests of lenders – as well as homeowners – to work with borrowers to come up with an alternative plan rather than deal with the hassle and expense involved with taking them to court and repossessing the property. That said, foreclosure is often the last resort when all other options have been exhausted.
To learn more about the foreclosure process in Canada, click here.
What Are the Consequences of a Foreclosure?
Foreclosure has a number of consequences to homeowners. Obviously, the biggest and most notable repercussion of this process is the loss of the home itself.
But in addition to losing their homes, homeowners often suffer other consequences; namely, a big hit to their credit score. Having said that, there are certain situations when a foreclosure won’t affect your credit score.
The impact that foreclosure may have on your credit score will depend on your lender, your particular circumstances, the value of your home, and the outstanding balance still owed on the mortgage. In some cases, a foreclosure may not impact your credit score at all.
Does Foreclosure Always Affect Credit Scores?
In recent years, lenders have started reporting mortgages to credit bureaus. Before that, mortgages were not reported, which meant credit scores were not typically affected by foreclosures. But now, lenders report mortgages to the credit bureaus. If you’ve been hit with a foreclosure, this fact might be reflected on your credit report and your credit score could suffer, but only under certain circumstances.
For instance, if your lender doesn’t report your mortgage to the credit bureaus, then your credit score might not be affected by a foreclosure at all. But if your lender obtains a judgment against you to recoup lost money, your credit report will reflect this judgment and your credit score will be affected accordingly.
If the proceeds of the sale of your home do not adequately cover the outstanding balance of your mortgage, then your lender could take you to court to recoup any losses, and a judgment will be noted on your credit report. In this case, the judgment would seriously impact your credit score.
Want to know how your payment history affects your credit score? Find out here.
Unfortunately, mortgages are being increasingly reported to the credit bureaus because lenders have become more and more concerned about the potential of having to deal with a slew of mortgage defaults if interest rates soar. In an effort to protect themselves and minimize their risk, they have begun reporting mortgages and foreclosures. If your credit report does reflect a foreclosure, your credit score will suffer a great deal.
How Long Does a Foreclosure Affect Your Credit?
A foreclosure typically affects a credit score for years. In general, most Canadians who have gone through foreclosure usually have to wait anywhere between 7 to 10 years before their credit scores no longer reflect a foreclosure or judgment as a result of foreclosure.
Click here to know how long information stays on your credit report.
Until then, borrowers likely will not be able to secure a conventional loan from a traditional lender. Even after this time period has come and gone, it may still be necessary to provide a lot of paperwork as proof that you are able to carry a loan and make payments on time.
Having said that, there may be certain situations in which lenders may be willing to approve a mortgage after two years of foreclosure or judgment, as long as you are able to demonstrate that you are no longer considered to be a risk. However, these loans will almost certainly come with a higher interest rate compared to conventional loans for prime borrowers simply because of the added risk involved for the lender.
Looking for an alternative to foreclosure? Read this.
Your credit score after foreclosure will definitely be affected if your lender reports your mortgage to Canada’s credit bureaus. It will also be negatively impacted if your lender takes you to court for losing money after the sale of your home does not cover what you still owe on your mortgage, even if your mortgage was not reported.
However, in the absence of any one of these two scenarios, your credit score might not be affected at all. If it is, you can expect your credit score to be damaged for at least 7 years following foreclosure, after which you should start to see it improve as long as your spending behavior and finances are in order.