A foreclosure won’t wreck your credit forever, but your credit score will take a serious hit and the foreclosure will have a significant impact on your ability to obtain another mortgage for quite some time. Read on to learn more about what happens to your credit score following a foreclosure, as well as how short sales, deeds in lieu of foreclosure, and other forms of loss mitigation affect your score.
(To learn how to rebuild credit after a foreclosure, see our Credit Repair topic area.)
When you apply for a loan, one of the first things a potential lender looks at is your credit score, often the FICO score. (FICO is an acronym for the Fair Isaac Corporation, the creators of the FICO score). A foreclosure substantially lowers your credit score, which prevents you from getting favorable interest rates on any form of credit in the future, and can even prevent you from obtaining credit at all in some circumstances.
The drop in credit score varies from borrower to borrower. In general, you can expect to lose 100 points or more from your credit score as a result of a foreclosure. However, if you already have a low credit score, you’ll most likely see less of an impact than if you had a very high credit score prior to the foreclosure action.
Remaining current on other debts can help your score. The foreclosure will remain on your credit report for seven years, but its impact on your FICO score decreases over time. If you remain current on all of your other debt payments, a FICO score can start to rebound in about two years if you remain current on your other debts.
You can get a new mortgage as little as one year after foreclosure (for FHA-backed loans) if you meet certain criteria and maintain satisfactory credit during this time period; however, in some cases, it be as much as seven years from the completion date of the foreclosure before you can get another mortgage. (Learn more about FHA loans in our article Getting an FHA Loan After Foreclosure or Bankruptcy.)
There are no strict guidelines for when you can get other forms of credit after foreclosure. It is almost impossible to predict how a foreclosure will affect the availability or cost of obtaining other forms of credit, such as a car loan or credit card. A notation on your credit report that will result in a credit denial from one lender may not preclude you from obtaining credit from another lender. In fact, there are some car loan and credit card companies that specifically target individuals with poor credit histories, though you’ll generally have to pay a high rate of interest.
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage, whereas a deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. (Learn more about short sales and deeds in lieu of foreclosure.)
People often mistakenly think that completing a short sale or deed in lieu of foreclosure will save their credit score. However, these options are not much better than a foreclosure when it comes to your credit. Much like a foreclosure, a short sale or deed in lieu of foreclosure can result in a credit score drop of 100 points or more.
Creditors view these transactions as only marginally better than a foreclosure. In fact, many lenders require a period of two to seven years following a short sale or deed in lieu of foreclosure before they will extend new credit. This is because both a short sale and deed in lieu of foreclosure show that you defaulted on a mortgage loan and future lenders consider this as evidence of your inability to pay your debts and highly predictive of a future default.
Compared to a foreclosure, certain other loss mitigation options, such as loan modifications, have a relatively minor impact on a credit score. (Learn more about loan modifications in our Alternatives to Foreclosure area.) However, even if you do a loan modification, this doesn’t mean that your credit will be unscathed. If you were late on payments, the lender probably reported that fact to the credit reporting agencies. Also, your lender may continue negative reporting for late and missed payments while the loan modification application is pending.
Companies that advertise that they can fix your credit following a foreclosure are almost always a scam. Credit reports cannot be wiped entirely clean if there have been delinquencies on debts within the past seven years. In many instances, credit repair companies simply write a letter to credit report agencies disputing errors and outdated information, which is something you can easily do yourself. To find step-by-step instructions on how to clean up your credit report yourself, visit Nolo’s Credit Repair for Bad Credit section.