The Effect of a Home Foreclosure on Your Credit Report

Home foreclosure will have a severely negative impact on your credit report that will take years to overcome. If you are faced with financial circumstances that might lead to home foreclosure, it is important to understand how your credit report works, what foreclosure is, the effects of foreclosure and how you can repair the damage.

What Is Your Credit Report? 

Anyone who borrows funds, has a file on them with the three primary U.S. credit reporting bureaus: Experian, Equifax and TransUnion. Lenders report the borrowing you do and any negative activity such as late payments or a home foreclosure. Based on this credit history, the Fair Isaac Corp. calculates a FICO credit score for you which ranges from 300 to 800 points. The median U.S. score is about 720; excellent credit is 760; and bad credit is 620 or below.

Your ability to borrow and the interest rate you can be offered will be impacted by your ability to pay off debt and your credit score.

What Is Foreclosure?

It is important to understand that foreclosure is a process. It begins with you falling behind on your monthly mortgage payments. If that situation is not remedied, the home foreclosure process begins with a letter of demand sent to you by your lender. This is official notice that you are behind and owe the amount you have not paid. If these circumstances are not remedied, your lender will file a lien on your property, file foreclosure documents with a court and be awarded sole possession of your home. You are still liable for the amount of your mortgage not covered by the value of your home, although that is seldom collected.

Immediate Impact

For a lender to begin the home foreclosure process you must be late on your home payments by 30 to 90 days. That means even before home foreclosure proceedings have begun, you already have a negative impact on your credit report from one and possibly more late payments. The letter of demand impacts your report. Filing a lien impacts your report. And, of course, the final foreclosure impacts it.

A home foreclosure is estimated to lower your credit score about 35 percent in the first year. The figures are only estimates, but is important to see a quick example to determine the damage; if you had the median FICO score of 720 and your score was lowered by 35 percent, or 252 points, your score after foreclosure would be 468. That means if you could get a loan at all, you would pay three to five percentage points higher in interest than a borrower with a good score.

Repairing Your Credit

Unless there are errors on your credit report in your favor, there is no quick fix to repairing a damaged credit report. You must have a long-term perspective, pay all your debt on time and let the negative information fall off slowly. The good news is even with a home foreclosure, if you stay current on your debts, you can make substantial improvement in your credit score in about three years.