If you fall a few months behind on your mortgage payment, you’ll find yourself facing pre-foreclosure. While this doesn’t mean your house will get re-possessed right away, pre-foreclosure is just as serious as it is the first step in the foreclosure process.
Thousands of homes are foreclosed each year leaving a lasting impact on the owners’ lives. What is the process of foreclosure, how will it affect your credit score, and what are the long-term effects? This guide will help you learn everything you need to if you’re facing pre-foreclosure.
Ways to get out of pre-foreclosure
After the first notice, in the months leading up to the notice of default, there are several ways in which you can get out of pre-foreclosure and avoid losing your home.
A loan modification is one of the preferred ways to avoid losing your home at this point. You can ask the bank to extend the length of your loan, so you’ll have less to pay each month. If such an agreement is reached, pre-foreclosure ends, and you’ll go back to making monthly payments to the lenders.
If a loan modification isn’t an option, the next possibility is a deed in lieu of foreclosure. This means you give your house’s deeds to the bank. Not all lenders will agree to this, but if they do, the pre-foreclosure process ends.
The final option is a short sale. In other words, you sell your home and give the money to the bank to pay for your debts and mortgage. Again, this is a process the lender needs to agree to. But it is also an attractive option for them, as the homeowner will be doing the work of finding the buyers.
Long-term effects of a foreclosure
Even if you manage to get out of pre-foreclosure in time to keep your home, the effects of the process will still be felt long-term over your credit score. That’s because credit scores are based on payments. So, once you fall behind with a payment, this will be recorded and credit agencies will be able to see it. The good news is that if you manage to get out of pre-foreclosure, the effects won’t be as bad.
Foreclosure effects on your credit score
It is not unrealistic to see an estimated 100 to 200 points drop in your credit score as a result of late mortgage payments. Given that credit scores range from 300 to 850, you can see that such a big dip will place you in a negative spotlight. This means you can expect to have a very hard time getting a credit card or a loan in the future. And that’s not all. Some employers check credit scores, so it may be more difficult for you to get a job.
How long does a foreclosure affect your credit score?
If you’re worried that once you go through a foreclosure you’re doomed forever, rest assured, you’re not! A Foreclosure appears on your credit report within 1-2 months of the missed payment. They will clear after 7 years from the date of the first missed payment. Sadly, it is difficult to remove a foreclosure sooner, regardless of why it happened. If for whatever reason, the foreclosure does not drop from your credit report at the end of this period, you’ll need to use the credit report dispute process to make the necessary corrections.
Some things in life are simply unavoidable and must be dealt with. However, when it comes to a foreclosure you may have options that make more sense. A short sale is not a perfect option, but much better than a foreclosure. If you find yourself late you should always access your situation and know where you stand before moving forward.