How Repossession Affects Your Credit Rating

Types of House Possession Orders
Repossession – What Happens on the Day of Hearing
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How Repossession Affects Your Credit Rating

Repossession will hurt your credit rating unless you quickly settle outstanding debts with the lender. If it’s possible, take steps to stop repossession before it happens. Job loss or illness can cause you to fall behind on payments. If you want to stop repossession, sell your home in the open market or contact a cash home buyer to prevent a negative financial and emotional event. Or borrow money to pay off the lender if you’re expecting your financial situation to improve in the near future or if you have money stuck in an asset that you’re expecting to liquidate soon.

It won’t take long for repossession to appear on your credit reports. Buying a home after a house repossession won’t be easy. It’s best to avoid an entry on the register of the Council of Mortgage Lenders. A negative entry can last up to six years.

If the repossession has already been reported by the credit bureaus, contact an attorney NOW to erase it from your credit rating. It’s all about negotiation. A lawyer can negotiate with the former lender and credit bureaus to remove the negative from your credit reports. Erasing the repossession can improve your credit scores and place you in a stronger position to get new loans.

Repossessions vs. Foreclosures

Remember that in the UK, a repossession isn’t the same thing as a foreclosure:

  • In a house repossession, the mortgagee takes the property back, sells it, uses the proceeds to repay what’s owed, and returns the balance to the mortgagor.
  • The law once said that the mortgagee must take “reasonable” care while selling the property and should look for “the best price that can reasonably be obtained”. However, now The Building Societies Act (1997) says that the mortgagee must take “reasonable precautions to obtain the true market value” of the mortgaged property.
  • It’s usual for the mortgagee to obtain a Court Order to complete the repossession, but it isn’t required to sell the property at an auction. The Courts recognise that an auction might not be the best recourse to true market value.
  • In comparison, a foreclosure means, the mortgagee takes back the property, sells it, and retains 100 percent of the proceeds.
  • The lender must get a Court Order to foreclose, but that’s difficult these days. It’s usual for the Courts to grant a repossession order.

How to Rebuild Credit after Repossession

If you can’t stop repossession, be informed that a repossession on your credit reports equals a big negative on your credit history. This can make it difficult to get a new mortgage.

Take these steps to rebuild your credit score:

  • Stay on top of any payments to be made: Make sure all your accounts are paid on or before they’re due. Pick your smallest accounts and pay them off first. Freedom from debt is your goal.
  • Manage your accounts: Consider credit utilisation. Don’t use more than 25 to 30 percent of your available credit. Keep track of your credit cards, personal credit lines, internet service, mobile service, and utilities whilst you’re rebuilding a credit rating.
  • Reduce your debts: Take a second job if necessary to reduce outstanding account balances and don’t add new credit lines going in the future.
  • Set yourself a budget: Operate your household judiciously and on cash basis.

Repayment Negotiations and Credit

Once you get control of your accounts, you’ll probably wonder if paying off the repossession in full can help your credit score. The answer is yes, you can improve your credit score by repaying the repossession figure in full.

However, you must first ensure that the lender writes off your debt and then records that you paid the debt in full. A lawyer can negotiate with the lender to remove the record from credit reports so it won’t have a lingering negative impact on your credit rating.

If you can’t pay the repossession in full, negotiate with the lender to reach a settlement figure. Although settlement means you’re paying less than the outstanding repossession balance, your attempt at repaying some of the debt may be taken in good faith by the lenders.

Mortgage after Repossession

A previous repossession means you may end up paying a higher than market interest rate on a new mortgage loan. Your new lender will need information about the repossession, including:

  • The date your property was repossessed
  • Repossession size
  • Reason for the repossession
  • Mortgage lender who repossessed
  • Legacy payments, if any
  • Other credit issues
  • Post-repossession credit conduct
  • New loan-to-value
  • New loan interest rate
  • New loan affordability
  • Remortgage after repossession

Sub-prime mortgagees provide mortgage loans to buyers with less than ideal credit ratings. It’s usually a more sensible and also less expensive to keep on hold the idea of buying a new house until your credit conduct is rehabilitated after the repossession:

  • Lenders want applicants who demonstrate recovery after a negative financial event like a repossession.
  • Lenders look for borrowers who are unlikely to default on a new mortgage.

Show your new lenders that you’ve learned from the house repossession experience and are prepared to pay off the new loan easily. Demonstrate responsible credit conduct after your property loss. If your credit woes continue after the repossession and brand new credit problems still keep appearing on your credit reports, you’re less likely to be approved for a new mortgage at any rate.

Good Credit Habits for Life

Consider slow and steady good credit habits to rebuild your credit rating:

  • You need reliable, predictable cash flow. Consider adding part-time or freelance employment to bring in extra cash each month until your debts are repaid.
  • Elect auto-payments when possible to ensure your accounts are paid on time. A late payment can hurt your credit for years to come.
  • Don’t add new accounts. Pay off your bills and maintain low credit utilisation. Live frugally if you have to.

Good financial planning for the future should include a rainy day account. Put away at least six months’ income in a liquid account. Avoid a second house repossession by planning ahead. Protect your hard-won good credit rating.

Home ownership is a major financial decision. Prepare to own a home for the long-term by living within your means. Use your good credit rating to build the life you want. A bad credit rating is simply too expensive.