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 to Rebuild Your Credit After Foreclosure

Experiencing foreclosure can be a significant setback, but it's not the end of your financial journey. Rebuilding your credit after foreclosure is a process that requires patience, discipline, and strategic planning. Here are key steps to help you on this path:

1. Understand Your Credit Report

• Regular Monitoring: Start by regularly checking your credit report. This will help you track your progress and identify any inaccuracies or errors that need to be addressed.
• Dispute Inaccuracies: If you find errors on your credit report, dispute them with the credit bureau. Accurate reporting is crucial for a fair assessment of your creditworthiness.

2. Manage Your Finances Wisely

• Create a Budget: Develop a realistic budget that prioritizes essential expenses. Stick to this budget to avoid falling into debt again.
• Reduce Debt: Focus on reducing any outstanding debts. Paying down balances, especially on high-interest debts, can positively impact your credit score.

3. Re-establish Credit

• Secured Credit Cards: Consider using a secured credit card, where you deposit money as security for your credit limit. This can be an effective way to rebuild credit if used responsibly.
• Small Loans: Apply for small loans or credit builder loans from financial institutions that report to credit bureaus. Ensure timely repayments to build a positive credit history.

4. Practice Good Credit Habits

• Timely Payments: Always pay your bills on time. Late payments can significantly harm your credit score.
• Credit Utilization: Keep your credit utilization low. Using a small percentage of your available credit is seen positively by credit bureaus.

5. Be Patient and Persistent

• Long-Term Perspective: Rebuilding credit is a marathon, not a sprint. It takes time to see significant improvements in your credit score.
• Consistent Effort: Stay consistent with your credit-building strategies. Over time, your efforts will reflect in your improved credit score.

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.