Voluntary Foreclosure
Candlefocus EditorWhen a borrower decides to pursue a voluntary foreclosure, they must notify the lender in writing of their decision and provide certain documents that explain the conditions under which the foreclosure is taking place. The lender will then work with the borrower to facilitate the foreclosure process, during which the lender may incur additional fees, such as for legal documents. Once the borrower’s loan is fully discharged, their credit score will suffer.
Impacts of voluntary foreclosure can include a significant drop in credit score and an inability to take out new loans in the near future. The magnitude of the impact on their credit rating depends on the borrower's repayment history, the size of the loan, and how long the credit has been in repayment. Credit-reporting bureaus typically report voluntary foreclosures in the same manner as an involuntary foreclosure.
However, voluntary foreclosure can provide a better outcome for borrowers than an involuntary foreclosure. Involuntary foreclosure usually results in a more significant damage to the borrower’s credit rating and may even involve legal action taken by the lender. Voluntary foreclosure can mitigate the amount of damage to the borrower’s credit score, which can allow them to pursue other forms of debt relief in the future.
Voluntary foreclosure should only be pursued when the borrower lacks any other options - and if so, they will want to seek legal counsel first. Borrowers should weigh the pros and cons of a voluntary foreclosure, considering that it may still cause long-term damage to their credit score, and can result in other legal ramifications if the loan is not forgiven.