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Home Foreclosures and Your Credit: What You Need to Know

Home foreclosures have a long-term impact on your credit score.

Home foreclosures are difficult and challenging experiences for families. Not only do you lose your biggest financial asset, but you are left without a home of your own. If you are struggling with your mortgage payments and considering the best choice for your family, definitely recognize that home foreclosure will have a long-term, detrimental impact on your credit.

Initial Impact

If you foreclose on your home, expect your credit rating to drop from 250-280 points. It will stay on your credit report for seven years. With two years or more of on-time payments, you can restore your traditional credit rating over time although you will still not be eligible for a home loan. Home foreclosures on your credit report are red flags to anyone else who may lend you money.

Long-Term Impact

If you experience extenuating circumstances that cause you to foreclose on your home, your penalty will not be as severe. You will need to show your lender documentation from the event like a divorce, illness, death in the family or job loss. Either way, though, foreclosing on your home will make it very difficult for you to buy a home moving forward.

When you default on your mortgage, your home most likely ends up in the hands of Fannie Mae. Also known as the Federal National Mortgage Association, this government-sponsored company is the largest secondary buyer of mortgages in the United States. To ensure that borrowers do not continue to default on their home loans, Fannie Mae stipulates a required waiting period for individuals with a history of foreclosures. Borrowers without extenuating circumstances need to wait seven years to receive a home loan after a foreclosure while borrowers with extenuating circumstances need to wait three years and then follow strict regulations for the following four years.

The Next Steps

If you had to enter into a home foreclosure, the best way to restore your credit is to work on the other aspects of your financial heath. You can restore traditional credit by only using 30 percent of the credit line available to you and by paying your credit card and bills both on time and in full at the end of the month. Ask yourself which costs are necessary and how to limit additional spending. You can get creative with your spending by cooking at home and buying clothing and furniture secondhand. The more ways you can support your financial growth, the better. If you would like to talk to a professional who can help you along the way, reach out to a CESI counselor to help you get started on your new path.

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