The impact of a home foreclosure on one's credit report or record is an interesting issue. Most would assume that it would result in a negative mark, trashing the credit record and resulting in bad credit for seven years, or so the rumor goes. However, no one really knows for sure since the company that actually produces the credit scores, Fair, Isaac and Company, is not willing to disclose the statistics. So how does one figure out the right answer for their situation, particularly in California? A little homework in understanding the credit score system helps.
The Credit Score Process
Your credit score, also known as your FICO score (an abbreviation for Fair, Isaac and Company), represents your credit-worthiness via an industry standard scoring system. In an nutshell, the credit score takes into account your income, your outstanding debts (both revolving and long-term), your payment history, and your lines of credit. A few other factors are included, but these are the major ones. The resulting calculation is your score. In today's market, scores above 680 are generally considered good.
However, a good score does not guarantee credit approval. This is because banks and lenders only use credit scores as a gauge and each has their own individual criteria of what they consider a good borrower. California is not unique in this respect.
The score is updated whenever there is a change in the tracked factors or when there is an inquiry into your record (not counting your own). Too many inquiries give the impression that you are shopping around for credit and thus your score lowers, for example.
The Foreclosure Impact
There is a common rumor that if you default on a home loan once, your credit will be damaged so bad that you can never buy a home again. Another rumor runs along the lines that your credit score will be automatically crippled for a seven-year penance period before you can consider getting credit again. Both are inaccurate.
Purchasing a home again in California will depend on a number of factors aside from your score. Your down payment, your income, your type of loan request, and your willingness to pay more in interest all come into play. As a result, it is possible for people who have lost a home in foreclosure to buy again a year or two later. Each case is specific to its own circumstances. However, you can assume the second time around will likely cost more in borrowing interest and be a more difficult approval process than the first home was.
Score Point Changes Due to Foreclosure
Rough estimates place the immediate credit score damage from a foreclosure in California to be somewhere between 100 to 200 points to the negative. So if you had a score of 680 before losing the home, you could go down as much as 480 or more, depending on your specific factors. (Remember that people in default usually lose more than one credit or loan account due to an inability to pay bills in general.)
California Reporting Issues
The credit score system is used currently nationwide by lenders, so there would be no specific California angle on how a credit score ding due to foreclosure is prepared. More often than not, the methodology specific lenders in hard-hit California areas used when considering future borrowing would depend more on local market issues instead.
Watch Out for the Details
The foreclosure record itself will stay on your credit report for as long as the information is allowed to be present. Again, the general belief is the imposition of an automatic window of seven years, but in many cases it can last much longer if the consumer does not proactively work to get the information removed. As a result, while your score may increase over time with good financial behavior, the impression of a foreclosure record even being present could dash future applications when a lender reads your report fine print.
0 comments:
Post a Comment