Most people experience financial hardship at some point in their lives. They might get laid off from work, be burdened by debt or become disabled due to an unfortunate accident.

During hard times, it can be difficult to make mortgage payments. If you're considering a foreclosure on your home, consider the effects it will have on your credit and financial health down the line.

What is Foreclosure?

Foreclosure can occur when you miss your monthly mortgage payment. If the bank or lending company that houses your mortgage loan decides to take action, they will repossess your house, according to the U.S. Department of Housing and Urban Development. Once the foreclosure has officially gone through and your house has been repossessed, you are required to leave the premises immediately, regardless of whether you have items in the house.

Luckily, banks give notice before performing the repossession. Depending on the lender, you’ll generally have a few months notice before you need to vacate. In that time, if you can find the money to pay your mortgage, you can halt the foreclosure as well.

How Does a Foreclosure Impact Credit?

Since foreclosure happens when you can’t pay your bills, it will have an adverse effect on your credit. According to Les Christie of CNNMoney, a foreclosure will reduce your credit score by 85 to 160 points on average. Generally, a foreclosure will affect someone with higher credit more than lower, as evidenced by the article’s findings.

With lowered credit, you have less opportunities in the future. Lowered credit will affect your approval for new mortgage loans, personal loans and credit cards.

What Are Other Things That Affect Credit?

Foreclosure isn’t the only aspect of your home loan that can affect your credit score. Even just having a late mortgage payment without entering foreclosure can lower your score. For instance, if you are 30 days late with your mortgage payment, you’ll typically lose 40 to 100 points on your credit score on average, according to CNNMoney. If you still can’t pay your monthly mortgage loan payment, you’ll lose an average of 70 to 135 points after 90 days.

Although many people with money problems see bankruptcy as their saving grace, this actually has a worse effect on your credit score than a foreclosure. When you file for bankruptcy--a liquidation of assets to pay off large sums of debt--you lose 130 to 240 points on your credit score on average.

What Are Alternatives to Foreclosure?

Since you’re both losing your home and taking a hit on your credit report, foreclosure should be a last resort. Fortunately, there are alternatives to foreclosure so you don’t end up with nothing.

The U.S. Department of Housing and Urban Development suggests that you look into home assistance that can help if you’ve had a recent economic hardship. To find a housing agency near you to help with counseling, call the HUD hotline at 1-800-569-4287. Call this number as soon as you start having trouble making your payments so you don’t run out of time before a foreclosure.

Your bank or lender may have alternatives for you as well. Contact the lender and ask if they have any special forbearances, mortgage modifications or partial claims. The lender will ask for proof of your economic hardship, such as a reduction of pay or unemployment insurance benefits.

If a foreclosure is still in the cards, consider a pre-foreclosure sale on your home to sell it before the repossession goes into effect. At least this way you get the proceeds from the sale rather than the bank.

Photo courtesy of austinevan via Flickr