Credit Consequences of a Foreclosure

Having a mortgage lender foreclose on a property involves more than losing ownership of your home. It precipitates several negative credit consequences, which go far beyond a damaged credit reputation in some cases. While it might be a good option for some, foreclosure can leave former homeowners in a vicious credit cycle that generates further obstacles to rebuilding a good credit standing. Foreclosure affects credit directly, in terms of lower credit scores and damaged credit histories, but it can also limit borrowing opportunities and create other financial difficulties.

• Lower credit scores

How you pay your bills contribute to 35% of your FICO score. This includes factors that range from late payments to bankruptcy. A foreclosure is not nearly as bad as filing for bankruptcy, but once the lender reports it, your credit score will plummet sharply. According to, a foreclosure can take anywhere between 85 and 160 points from your score. Even if you have a good score (720 for example), a foreclosure could see you fall into a lower category of credit – average or poor.

The foreclosure is often the conclusion of a period of financial and credit trouble. What makes the credit score drop precipitously with this situation is often the series of missed payments before the foreclosure is filed. There is also a notice of default that is filed before foreclosure. This takes a few points before the fact as well. 

• Higher borrowing rates and limited borrowing opportunities

With a foreclosure on record, unfavourable credit offers or reduced credit options are some of the consequences. These result from the negative effect of credit events prior to the foreclosure as well. A default rate on credit cards would be a luxury if you had a foreclosure filed against you. Credit cards rates could jump to as high as 30%. In addition, even getting shorter-term loans (car loans and other consumer loans) could be more difficult.

• Damaged credit history

In some circumstances, a foreclosure might be a significant blip on a very good credit history. Where the foreclosure comes after late payments and a notice of default, this history can be difficult to overcome. A foreclosure filing stays on your report for seven years. However, this does not suggest that credit suffering must be endured for that long. Former homeowners can begin to see the benefits of a rehabilitated record within a 24-month period.

• Lower finances

Reduced finances can easily put someone on a credit cycle that might worsen their credit, or prevent them from taking steps to improve their credit score. Homes might be foreclosed for a variety of reasons, but lack of funds is a common factor. A foreclosure because of financial hardship would be more difficult to recover from for those who did not have a good credit standing before the foreclosure. The increased fees and interest paid by such persons after the foreclosure would be markedly decreased.

• Deficit balance judgments

In rare circumstances, mortgage lenders might seek a judgement against a mortgagee who experienced foreclosure. This is not an option that many mortgage lenders take. Not only does it affect the reputation of the lender, but they are not likely to gain anything from their investment if they pursue that option.

The key to limiting the consequences is nipping the problem in the bud – especially within the first two years of the foreclosure. It might be an even better option to prevent the foreclosure in the first instance, by following these tips.