How a Foreclosure Affects Credit

Foreclosures are all too common place, leaving often desperate homeowners to face a long battle to rebuild their credit scores. Foreclosures can severely damage credit scores, yet there are many variables surrounding their long term impact. Although they remain on one’s credit file for a minimum of seven years their impact begins to lessen after two years, dependent on other factors.

Having a home foreclosed on has a significant negative impact on credit with the average Fico score taking a hit of around 250 points. The downward spiral of credit commences before foreclosure, as missing a mortgage payment will cause a drop in score. This is then made considerably worse once a default is recorded. However if a foreclosure is the only negative on an otherwise excellent credit record, its impact will be less severe than if other credit accounts are also in default.

Once a foreclosure is recorded on credit reports it is visible to other lenders, and to other individuals who access one’s credit report. Potential landlords, employers and insurance companies will see a recorded foreclosure and may well be adversely influenced by it.

Homeowners often try to avoid a foreclosure being recorded in an effort to protect their credit, opting instead for short sales or returning deeds in lieu of foreclosure. However as each of these stages will also have a recorded mortgage default, their negative impact is also significant, though not as long lasting.

Although a foreclosure cannot be removed from credit reports for seven years their impact does lessen over time. Myfico advise that “if you keep all of your other credit obligations in good standing, your Fico score can begin to rebound in as little as 2 years.” When a foreclosure is isolated as the only credit negative then the long term damage can be minimal.

There is a growing tendency towards strategic mortgage defaults as homeowners who can afford their monthly mortgage payments simply stop paying, as their mortgages outstrip the value of their homes. When foreclosures result then lenders are far more likely to pursue such homeowners in the future for deficiency judgments, if the state allows.

It could well be a case that those who choose strategic defaults and are prepared to sit out the two year credit damage could well face court proceedings later on. These will continue to negatively affect their credit and may well result in bankruptcy. Also lenders are likely to take a far more negative view of strategic defaulters who apply for future mortgages.

The average homeowner who undergoes foreclosure with no strategic planning will certainly suffer the impact of a reduced credit score. However if all other finances are conducted responsibly and financial obligations kept up to date then it may be possible to be considered for a new home mortgage loan after 2 -4 years.

Source: Myfico