Consequences Of A Foreclosure
According to NeighborWorks America, 1 out of every 200 homes will be foreclosed upon and every three months 250,000 new borrowers enter the foreclosure process. A foreclosure, in its simplest form, is the method in which the lender attempts to take possession of a home that the borrower is not properly paying for. A foreclosure will have a major effect on all areas of your financial life. This article will go over the areas that will be affected by the foreclosure and the the long term consequences.
How Does a Foreclosure Affect My Credit Score?
A foreclosure, on average, will lower your credit from 85 to 160 points. To give you an exact number would be impossible due to the fact that payment history is responsible for 35% of your overall credit score. The other factors that go into calculating your credit score are as follows; new credit is 10%, credit mix is 10%, length of established credit is 15%, amount owed is 30%.
There are lenders out there that are willing to work with individuals who have bad credit scores. Most lenders that work with low credit scores require their borrowers to have a minimum credit score of 580. Not only will it drop your credit score significantly, it will also spoil your report for the next 7 years. Does that matter? Absolutely.
Can I Buy a House After a Foreclosure?
After foreclosure, you will have to wait 7 years to get a conventional mortgage. The standard waiting period after a foreclosure for a conventional mortgage is seven years. FHA (Federal Housing Administration) loans are at three years. Veteran Affair loans are at two years.
The other negative effect a low credit score will have on buying a home after foreclosure is coming up with a down payment. FHA regulations state that a credit score higher than 580 requires a 3.5% down payment and a credit score lower than 580 requires a 10% down payment. If you are buying a $200,000.00 home, the 6.5% is a $5,000.00 difference in down payment. Every lender has different requirements but the same principle would apply to conventional loans.
How Does a Foreclosure Affect My Future?
The main issue you will find with having a foreclosure on your credit report is that your credit score will be down. With your credit score down and your credit report showing a foreclosure for the next 7 years, acquiring credit of any kind will be challenging. It is not impossible, but it will be costly. Lenders will charge a higher interest rate to people with average or below credit scores. The reason for this is because they are taking more of a risk lending to someone who has a financial history with imperfections.
A low credit score will also make it hard to obtain credit cards, personal loans, and even car loans. The credit cards you have access at a score of 620 will be less desirable and have higher interest rates than the credit cards you would have access to at 740. As for car loans, the average person with an excellent credit score pays somewhere around 3.75%, the average person with a score that is below average pays around 5.00%.
The effect a credit score has can even trickle down to everyday things such as cell phone service providers, water, electricity, and even internet service providers. If you have a low credit score, the providers of these services may require that you put down a larger security deposit to ensure they are made whole. Cell phone providers may not let you accept your application for financing on the newest phones.
Insurance is another necessity that may be affected by having a below average credit score. The cost of your automobile insurance would be higher than someone who has excellent credit. The same principle would apply for homeowners and renters insurance.
Does a Low Credit Score Really Make a Difference?
The following table will show you an example of how little differences now make large differences later. This scenario in the table is projecting a standard 30-year loan on a $300,000 property with a 20% down payment ($60,000.00).
|Interest Paid Over 30 Years||$172,486.82||$223,813.88|
As you can see from the table, a credit drop of 120 points could cost you over $50,000.00. You can apply this table to every kind of debt you may have; whether it be car or credit card debt.
As you can see, having a foreclosure on your credit report and having an average or below average credit score can cause serious financial problems. Only having access to average interest rates hinder your ability to save money that could be passed down to your children or could be spent enjoying life.
If you find yourself facing a potential foreclosure and you are not sure what to do, give FL Home Buyers a call. After a brief phone call we would be able to determine what we feel is the best outcome for you and your loved ones. We buy houses fast and we pay cash. We have helped countless homeowners avoid foreclosure and we’ve created win-win solutions for all parties involved. Give us a call today!