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Foreclosure is a highly unfortunate event that forces homeowners to lose their homes after defaulting on their mortgages. If you’re home is being foreclosed, it’s best to understand how it may impact you, including your credit scores. 

Key Points You Should Know

Does foreclosure affect your credit score?Yes, it can (more details below).
How long does a foreclosure stay on your credit report?6-10 years (more details below).
When does a home go into foreclosure?Lenders will generally start the foreclosure process if you’ve missed 3-6 payments in a row. 

What Is Home Foreclosure?

Foreclosure is a process of repossessing a property after a borrower misses their mortgage payments. 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.

Does Foreclosure 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. 

Missed Payments 

Three consecutive missed payments generally force the lender to start the foreclosure process. These missed payments are usually reported to the credit bureaus which can impact your credit scores negatively.

Deficiency Judgements 

If the proceeds from the sale of your home during foreclosure do not cover the outstanding balance of your mortgage, your lender can take you to court to recoup any losses. This is called a deficiency judgment and it will be noted on your credit report. These judgments can seriously impact your credit scores.

How Long Does A Foreclosure Stay On Your Credit Report?

A foreclosure typically stays on your credit report for years. In general, most Canadians who have gone through foreclosure usually have to wait anywhere between 6 to 10 years before their credit reports no longer reflect a foreclosure or judgment as a result of foreclosure.

EquifaxTransunion
Legal judgmentsJudgements are debts you owe through lawsuits.

Note: TransUnion keeps legal judgment information for 7 years in Ontario, Quebec, New Brunswick and Newfoundland and Labrador and 10 years in P.E.I.

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Other Consequences Of A Foreclosure

If you’re at risk of foreclosure, you’ll need to prepare for the possibility of the following repercussions:

Loss of Your Home 

Unless you’re able to repay what you owe before the foreclosure process is complete, you will lose your home. This will not only force you to find somewhere else to live, but it is also a very emotionally draining process.  

Deficiency Judgment

You could wind up with a deficiency judgment. This is a legal ruling against you if you default on your mortgage and the value of your home is not high enough to cover your outstanding debt. In this scenario, you would be required to come up with the difference between your remaining mortgage balance and the amount your home sells for.

Extra Taxes Payable

If your property is repossessed because you defaulted on your mortgage, you’re considered to have sold the home. This may result in a capital gain or loss, depending on how much you owed when your home was seized, and could lead to tax implications when it comes time to file your income taxes

Negative Impact on Your Credit Score

A foreclosure can significantly hurt your credit. How badly your score will be affected depends on your current credit score, the amount you owe on your mortgage, your home value, and the lender. 

When your credit score takes a tumble, it will be very difficult for you to get approved for loans and credit accounts in the future, as lenders may see you as a risk. Even if you can get approved, you’ll likely be charged a much higher interest rate and won’t qualify for a larger loan amount.

How To Improve Your Credit After A Foreclosure?

One of the first things you should focus on following foreclosure is rebuilding your credit. While this may take some time and work, it’s possible to bring your credit score to a healthy level by doing the following:

Monitor Your Credit Score 

You should get a copy of your credit report every year from the credit bureaus, or an online resource like Loans Canada’s CompareHub. Not only will this report show you what your credit score is, but it will also give you a chance to spot any errors that could be pulling your score down. If you notice any mistakes, report them right away and have them corrected.  

Make Timely Loan Payments

One of the best ways to build good credit is to pay your bills on time, particularly on accounts reported to the credit bureaus. If you cannot get approved for a new credit account because of your bad credit, consider applying for a secured credit card. 

This type of card is backed by a deposit that you make, which acts as collateral on your account. Every timely payment you make toward your monthly bill will be reported to the credit bureaus, which will help gradually build a healthy credit history. 

Will I Be Able To Get A Loan After A Foreclosure?

Borrowers likely will not be able to secure a conventional loan from a traditional lender. Moreover, you’ll need to provide a lot of paperwork as proof that you can 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 can 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.

Final Thoughts

In the event of a foreclosure, your credit score will likely be negatively affected due to several factors. From the initial missed mortgage payments to the court judgements, your credit score can fall quite a bit with a foreclosure. However, these remarks don’t stay forever, within 6-10 years they’ll be wiped off your credit report and you’ll be able to rebuild your credit.

Foreclosure FAQs

How long does a foreclosure take?

Foreclosures typically take anywhere from 6 to 10 months to complete. It’s in the best interests of all parties to come up with an alternative plan rather than deal with the hassle and expense involved with foreclosure. That said, foreclosure is often the last resort when all other options have been exhausted.

How many payments can you miss before foreclosure? 

If a homeowner is three months overdue on their mortgage payments, they face the real risk of having their home repossessed by their lender.

When will a foreclosure be removed from my credit report? 

A foreclosure can remain on your credit report for 6 to 10 years. 

Can I negotiate with my lender to avoid foreclosure?

Yes, you can contact your lender to see if they’re open to working out a solution to avoid foreclosure. For instance, you may negotiate lower monthly payments, a lower interest rate, a payment deferral, or more time to catch up on payments missed.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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