How Does a Foreclosure Affect Your Credit?

With today's economic crisis we are seeing record highs of foreclosures on the market. If you are in this situation there is probably a million questions running through your head. Probably the most important, and most frequently asked, is how it will affect your credit. Of course a foreclosure on your credit history will be detrimental.

There really is no disclosed number of points that will be docked from your credit score; however an unofficial number has been rumored to be around 260 points. A good credit score is 700 or higher. An average credit score is around 600. Therefore if you’re current credit score is at 650 you can roughly expect your score to drop to around 390. Even if you have an excellent score of 800 your score will be dropped to around 540 which are still considered to be a negative credit score.

There are two main reasons that we as a country are currently in this housing crisis. The economic crisis was started by borrowers taking out bad loans, and lenders selling the bad loans to the consumers. Most of these loans included arms which is where the payments were low for the first few years. After the first few years the payments would skyrocket.

Lenders would sell these loans to consumers by telling them that they would be able to sell their homes or refinance their homes when their payments increased. Other bad loans included variable interest rates. This again would give a good introductory interest rate, and then the interest rate would increase exponentially after the first few years making payments impossible for the home owners.

This started a domino effect which eventually leads us to record breaking unemployment rates. Because there were millions of these types of loans all at the same time it forced many home owners to go into foreclosure. This affected many industries including banking and real estate. It then got difficult for these consumers to afford or finance anything which then hurt other industries such as automotive and furniture.

If you are in this situation there are a few things you can do to stop foreclosure. There are many foreclosure assistance companies that can help you go through your bills, consolidate your debts, and negotiate with your mortgage lender to get your monthly payments down to something you can afford. You can also contact your mortgage company immediately and try to work out a loan modification. You should also research options such as short sales, a deed in lieu, or cash for keys.