FORECLOSURE IMPLICATIONS
If you’re unable to do anything to save your home, and must allow it to go up for auction, there are credit and tax implications. You will need to be ready to rebuild your credit profile. Once a home is lost to foreclosure, the homeowner’s credit score will drop by as much as 250-280 points. The credit rating will be restored after payments have been made on time for three years. If the credit score is otherwise sound and the foreclosure was an isolated event, homeowners could rehabilitate their records in two years (24 months). This situation is rare, however. Foreclosure typically involves escalating rates which push the individual into more debt. The long-term consequences of foreclosure include years of limited and expensive credit, which can make financial recovery a challenge. Payment history, amounts owed, types of credit used, new credit and length of credit history are all factors that determine a FICO score. Most borrowers want to see a credit score higher than 620 to qualify for a conventional loan. This score becomes increasingly difficult with foreclosure dropping credit scores by 250-280 points. The effects of this are significant. Be prepared to deal with denials of mortgage and credit applications for multiple years once the foreclosure is done. However, as time goes by, the effects will begin to lessen. Once you establish a good line of credit again, be prepared for traditional mortgage lenders to deny you for the full seven years, until your foreclosure has disappeared off your credit score report completely. Additionally, few homeowners in distress realize the tax consequences of a foreclosure. A property title transfer and subsequent tax assessment occur after a foreclosure. Most
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