Will foreclosure affect my credit score?
Foreclosure is a real risk for Canadians who struggle to make their mortgage payments every month.
With interest rates soaring in recent years, foreclosures have become more common across the country. If you missed a payment recently, you might be wondering what consequences will follow and at what point your home will get repossessed. Here’s a comprehensive guide about what to expect when faced with foreclosure in Canada.
What is foreclosure?
Foreclosure is the process of a lender repossessing your home when you default on your mortgage. Defaulting means you violated one or more terms of your loan, including but not limited to, being behind on mortgage payments, property tax, or homeowners insurance fees. One of the main causes of foreclosures is when homeowners take on way more debt than their income can handle.
Foreclosure is an incredibly stressful event for homeowners, so lenders typically don’t choose to repossess right away.Instead, they’ll work with you to build a payment plan so you can keep your home, but it could impact your credit.
How long does foreclosure take?
On average, foreclosures take anywhere from six months to a year to complete. It’s a tedious process for the lender because they have to prove that you breached the terms of your loan in court before they can legally repossess the property. This is why foreclosure is a last resort for many lenders, once other options have been exhausted.
An example of other options is a Power of Sale, which allows the borrower to sell the property to repay the mortgage debt in the event of default.
According to RE/MAX, once 15 days have passed after your mortgage payment due date, you will face a late fee. After 30 days, your loan will officially default. At this point, your lender will report your overdue payment to credit bureaus, which will begin to impact your credit.
What are the consequences of foreclosure?
A common misconception is foreclosure automatically means you’ll lose your home. There are several factors that come into play before your property is repossessed. These include:
- Your financial situation
- Your willingness to work with your lender to find a solution
- Whether or not you defend your home in court
If you choose not to take any action, there’s a higher chance you’ll lose your home.
But the consequences you could face if you have to foreclose are:
- You'll lose your home, which can be super emotional and difficult to deal with.
- You might be stuck with a deficiency judgment, which means you'll have to pay the difference between what you owe on the mortgage and what the property sells for.
- In Canada, the sale of a foreclosed property may result in a taxable capital gain or loss.
- If you're still living in the house when it's foreclosed, you could be evicted and forced to find a new place to live.
- It might be tough to get a new mortgage in the future, since lenders will see you as a higher risk.
Foreclosure is definitely not something you want to go through, so it's important to get help from a financial advisor or housing counselor if you're struggling to make your mortgage payments.
Foreclosure could impact your credit score
Besides repossession, foreclosure could also spell disaster for your credit. The impact depends on where your credit score is today, how much you owe on your mortgage, the value of your home, and your lender.
What is a credit score?
First things first, if you're living in Canada and have ever thought about getting a loan, a credit card or a mortgage, then you might have heard about credit scores. So, what is a credit score anyway? Well, it's a number that shows how trustworthy you are when it comes to borrowing money.
Credit scores in Canada range from 300 to 900, and the higher your score, the better. Lenders, like banks and credit card companies, use your credit score to determine if you're a good candidate for borrowing money and what interest rate to charge you.
Factors like your payment history, amount of debt, and credit utilization all contribute to your credit score. It's important to keep an eye on your credit score and work to improve it if it's not where you want it to be.
So what does that mean if you have to foreclose on your home?
If your lender doesn’t report the foreclosure to the credit bureaus, your score won’t be impacted at all. But if your lender wins against you in court, your credit will reflect that. If the sale of your home doesn’t cover the outstanding balance of your mortgage, your lender could take you to court again to recover the remaining losses, and your score will take another big hit.
It can take anywhere between seven to 10 years for foreclosure to be removed from your credit report. Until then, you will have difficulty securing new conventional loans from other lenders. After foreclosure is removed from your report, you might still have to produce a lot of documentation to prove you’d be able to repay a new loan back on time.
There are private lenders who are open to approving new mortgage applications two years after foreclosure, but these loans will come with higher interest rates and fees in comparison to prime borrowers because of the added risk associated with foreclosure.
How can I protect my score against foreclosure?
If you have to miss a mortgage payment, the best thing you can do as a homeowner is reach out to your lender right away. Explain your situation and give them an idea of how long it will take for you to get back on track with your payments.
Your lender will likely be more willing to take a late payment, work with you to rectify the situation, and get your payments back on schedule, rather than going through the foreclosure process.
If you ever have any questions about your mortgage terms or payment schedule, get in touch with your mortgage agent today so you can stay on track.