How Does Foreclosure Affect Your Credit Report?

This is a difficult question to answer, yet one that I am asked several times a week by concerned homeowners. The challenge in offering a definitive answer comes from Fair-Isaac Company (FICA), the company who started the credit scoring system, and does not publicly share their algorithms for calculating credit scores. What complicates this issue even further is that all the credit information reported is calculated into a credit score as it is reported. The credit score is updated instantly only when there is an inquiry, otherwise it just sits waiting to be accessed. That means that there can be a cumulative positive and/or negative affect from multiple variables on an individual’s score at the time of an inquiry making it very difficult to determine what influenced the score in either direction and in what magnitude.

However, we do know some general things about the scope of the negative impact of a foreclosure on a credit score. The greatest negative impact on a credit score will occur in the situation is behind on their mortgage or loan payment anywhere beyond 30 days (this is the point at which lenders will report the deficiency to the credit company.) It is important to note that these late payments will lower the score even before the foreclosure itself is factored in and cannot be “undone” even after you negotiate a settlement or workout agreement with your lender. Typically, a homeowner is also late on other bills because of his financial crisis and has additional late payments, collections, or judgments, further damaging their credit problems.

A "before and after" foreclosure credit score will not conclusively answer the question of how much the foreclosure alone has hurt the credit score.  It will simply give us an indication of the magnitude of damage. The immediate impact of a foreclosure on an individual's credit report is estimated to be between 200 to 350 points, but the greatest damage results from late payments on other bills that quickly mount up.

Homeowners tend to believe that once they have had a foreclosure they can never buy a home again. This is not true. We see people buying homes within 2-4 years of losing their previous home.  Of course they will have to pay a higher interest rate (unless their down payment is substantial, usually 20% to 25% of the purchase price) but it is definitely possible to recover from a foreclosure, and recover quicker than you would think. The credit score reduction for the foreclosure is also reduced as time passes by which will result in an improvement of your credit score over time.

Doing a "Deed in Lieu of Foreclosure" with the lender does report a slightly lesser harm to your credit score, however, once again, unpaid bills surrounding the foreclosure and not necessarily the foreclosure itself do much of the damage.  It is generally believed that a foreclosure stays on your credit report for seven years.