How Foreclosure Affects Your Credit Score
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Foreclosed on? Just because you may have lost one home doesn’t mean you’ll never be able to buy another. But first, you need to engage in some credit score Rx.
“A foreclosure will cause a credit score to drop sharply, typically by 200 to 300 points,” says Andrew Housser, co-CEO of Bills.com, a free consumer portal of personal finance information. “That would drop a score of 700 – considered a ‘good’ score – to as low as 400 – considered pretty terrible.” The minimum FICO score is 340. This drop can affect your ability to not only purchase a home, but also to secure a car loan and even gain employment. “Lower credit scores can result in being denied credit, such as credit cards and car loans, and facing much higher rates for loans and even other items, such as insurance, that rely on credit scores,” notes Housser.
Don’t lose hope, though. While a foreclosure can remain on your credit report for seven years, it won’t ruin your credit score for life, adds Housser. “If you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as two years. The important thing to keep in mind is that a foreclosure is a single negative item. If you keep it isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.”
In fact, The Federal Housing Administration will allow a new mortgage to be approved if a past foreclosure was more than five years old,” explains Alan M. White, assistant professor at Valparaiso University School of Law in Indiana. “The impact of foreclosure on your score diminishes over time, depending on whether you have other active, on-time accounts,” he explains.
Of course, it’s preferable to avoid foreclosure altogether. Here are some ways to accomplish that goal. (Keep in mind, however, that many of these options require you to resume normal mortgage payments at some point. If you can’t afford to resume payments, it may not be worth the effort required to stop or reverse the foreclosure process.)
• Lender negotiation: If there is a reasonable expectation that you will be able to resume making regular mortgage payments within a relatively short time frame, the lender may be willing to work with you to establish a payment plan to bring the loan current. “Especially in today’s market, this is a greater possibility,” says Housser. “Many individuals are having trouble due to an unexpected job loss, medical expenses, divorce or other personal trauma. If the situation has some resolution so that the regular payments may be able to be met again, it is worth it to call the lender.”
• Forbearance agreement: For a temporary hardship, the lender might grant you a forbearance agreement to lower – or eliminate – payments for a limited time.
• Loan modification: This entails a permanent change to the loan, such as lowering the payment and extending the loan’s term or incorporating any delinquencies into future payments. “Lenders are more willing to discuss this now than they were before,” adds Housser.
• Deed-in-lieu of foreclosure: In this case, the lender takes ownership of the home, but that will not eliminate the negative impact of a payment delinquency or foreclosure that has already begun. “Bankruptcy remains on a credit report for 10 years, but it can offer a way to become current in payments, which will improve the credit score,” White notes.
• Refinancing: It may be possible to refinance a mortgage for a lower interest rate and/or lower monthly payment. But if you have already had late payments on a mortgage, the interest rate offered may be too high to lower your monthly payment. Housser recommends using online rate comparison sites and calculators to determine the “real costs of refinancing.”
• Short sale: In a short sale, the lender accepts less than the mortgage debt when the property value has declined. “A short sale will prevent foreclosure,” says White. “However, if it takes place after foreclosure was initiated, the foreclosure and the related delinquency in payments will be reflected on the credit report.” The only way to protect the credit score fully is to maintain monthly payments until the house is sold.
• Chapter 13 bankruptcy: If the loan default is past the point of being resolved with the lender, you may file for chapter 13 bankruptcy protection. This protection requires you to resume making regular mortgage payments but allows the arrearage (being overdue in payment) to be repaid over the course of the chapter 13 plan.
All things considered, a foreclosure won’t ruin your credit rating forever. It will lower your credit score and remain on your credit report until you’re able to re-establish good credit — which takes time and careful planning. Consider your home purchase wisely.
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16 Comments so far
leave a commentWow, that is some excellent advise dude!
RT
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I think it is horrible that your credit score can effect whether you get a job or not, that is hardly fair practice in many cases, the employer see the score but do not know the story behind it such as a asshole phone company or faulty medical billing causing the drop.
People with low scored need employment more than anyone else in this world, as a matter of fact it should increase your chances rather than decrease them.
I used to work at a credit union as a marketing assistant. Everyone who works there was subject to a credit check prior to employment. The primary reason is that there is a greater possibility of theft because money is involved.
This is not really saying that because you have a bad credit score that you’re automatically a thief. You have to look at it from – in this instance – the credit union’s position. They have a fiduciary duty to secure their members’ money. There are instances that have normal, hard-working people end up in a financial bind and end up doing things that they wouldn’t normally do. Like steal, for instance.
Again, not to say that anyone with a bad score is likely to commit monetary theft (or if you work for, say, a government aerospace contractor – sell secret information) but you can see that there’s a greater chance that someone in dire financial straits would commit such a crime.
Like insurance companies that raise, say, health insurance premiums on people who have pre-existing conditions. Not to say that they will get sick and require payout in an amount far more than they’ve put in but there is a greater chance that they will.
No, I don’t think it’s fair because people are put in categories of good or bad based on some numbers. People are often more than just numbers. But do understand that businesses too have a duty to their members, employees or client to make sure that the trust put in them is secure. A credit review is an arbitrary number, yes, but until there’s a better way to judge an applicant to a sensitive position (without a lengthy, CIA-like background check – which even that is not flawless i.e. Aldrich Ames), a credit score will have to do.
Thank you for making this summary available. As a bankruptcy attorney, I see many people with serious mortgage problems and the common thread is the sense of hopelessness. Sometimes people can even keep their homes and eliminate a second mortgage or HELOC through “lien stripping” in Chapter 13.
There are several options available, in or out of bankruptcy, and all will not be lost, even if the home must be. Credit can be rebuilt surprisingly quickly and it is better to address the problem in some fashion rather than to live under the burden of an unpayable mortgage.
This has some good information. I will use it when I call WAMU yet again. Four months ago I sent in all the paperwork for a home loan modification and still haven’t been contacted back regarding it. Every time I call I’m told someone will be contacting me soon…never happens. Unfortunately I was able to check just about every box on the form..divorce, cancer, reduction in hours (now laid off), etc. If anyone should qualify you would think I would. I called them when I first had trouble paying my house payment but they told me since it was in the process of modification there was nothing they could do to help me. What?! I called back when I lost my job and put the house up for sale. Once again I was told someone would call me and that I should send in a hardship letter. I faxed in the letter as advised. Now since I’ve missed two payments I’m getting the phone calls and letters about bringing my account up to date. NOW they are offering help. Why couldn’t they offer me help while I was still current so it didn’t have to get to this point?! I was actually told in the beginning that my modification was pending because my account was current. The irony is that my former employer whom I have a credit card through has sent me a letter to lower my credit limit and up my interest rate. Talk about adding insult to injury! This sucks! Until this I’ve had excellent credit…I got credit card offers just about every week. Amazing! They say things happen in threes, hopefully I’ve had my three!
Cassie,
Have you contacted a HUD-approved housing counseling agency? Agencies like HomeFree-USA employ HUD-certified counselors who not only are well versed in loan modification options, but also are excellent negotiators with lenders. HomeFree-USA has helped 90% of distressed homeowners who have sought help. Why not give us a try?
Because of a vicious divorce (I was jailed AND acquitted 7 times by an extremely greedy spouse), my mortgage payments fell behind. I was eventually awarded the house (4 years later) by the courts and immediately attempted to get current with the bank. The bank instructed me to wait until it could work out a detailed plan before I paid anything.
Despite sending more than 35 registered letters, e-mails, and phone calls the bank never responded. My home was sold at auction last week for $140,000 less than the appraised value.
Going forward I will do without rather than buy anything on credit. In addition, I am assuming that if businesses really want to sell me something they will find a way.
I’ve learned two good lessons. Don’t marry greedy people. Don’t share a loan obligation with anyone.
Short sale: In a short sale, the lender accepts less than the mortgage debt when the property value has declined. “A short sale will prevent foreclosure,” says White. “However, if it takes place after foreclosure was initiated, the foreclosure and the related delinquency in payments will be reflected on the credit report.” The only way to protect the credit score fully is to maintain monthly payments until the house is sold.”
I have been negotiating with CountryWide/BoA for over a year now to do a short sale. 3 of 5 offers have fallen through because they take so long to process. (45-60 days, hence so few offers) However, they will not approve a short sale if you keep paying, so this advice in not accurate for all banks.
“Forbearance agreement: For a temporary hardship, the lender might grant you a forbearance agreement to lower – or eliminate – payments for a limited time.”
I wonder if it has become harder or easier to get a forbearance agreement now that we have experienced/continue to experience the housing meltdown. This seems like it could go both ways for the bank – either someone is just buying their time before the inevitable (foreclosure) or it could be what they need to get back on the right path. Either way this seems like one of the best options available for the homeowner, if they can get the bank to agree to it.
-DC
I am in desperate need of some advice. I am a single mom of two, paying a ridiculous $2000.00 mortgage, with a 9.5 ADJUSTABLE interest rate. When I saw how much is applied toward the principle, I almost cried. I tried to refinance, but of course I owe more than the house is worth. I tried the home modifiaction but was declined. They stated “the dedt to income ration was sufficient”. Wow, with $0 money left in my bank account after all is paid, how did they figure that one out. I dont want to lose my house, but at this rate I will never own it. Is foreclosure my only other option.??
Um, while this is the very tip top of the info icebeg on the subject, you may actually want to have correct info to give to the people. First of all, people do not get “foreclosed on”….they allow their house to go into foreclosure by not paying the mortgage for 120 days. It’s not done to you, it is done because of your not paying the mortgage. If you know what’s coming, you know what’s coming, try to do a short sale, and if that doesn’t work, well, live in denial for a while until you wind up at option 14, below. Depending on exactly how it’s reported, a Foreclosure may never leave your credit report. FHA will allow you to purchase a new home in only 3 years as of today. Keeping accounts in good standing doesn’t improve your credit score, it only maintains it…improving your credit score consists of paying off balances completely, and the longer aging of the account. Option 14, let it happen, and get on with your life. You can’t afford the house, that’s why you are getting foreclosed on, period. Move on. Rent a place to live, pay all your bills on time, and recover, and start immediately.
FYI, this article is incorrect. The FHA will consider a loan if you have foreclosure after 3 years, not 5. Fannie Mae and Freddie Mac are 5 years with 3 years on a short sale.
The FHA will also consider a loan after 2 years if you have a bankruptcy.
Go to the FHA website. They clearly explain this.
We have a new ebook called “Your Credit Sucks” that outlines the five steps folks need to take to improve their credit score. Free download at http://ratenerd.com/your-credit-sucks
I am a single mom of one daughter. I have had my position with a government agency for 3 years. In 2005 I, along with my ex-husband, filed bankruptcy. Our home at the time was included in the bankruptcy but is showing on my credit history as a ‘foreclosure’. Can anyone explain this to me?
The second thing I wanted to inquire about is regarding grant options (or the like) regarding downpayment and/or closing cost of a home –if I can qualify for a home loan. My lease amount on my townhome is rising drastically yet again. It is getting insane making these payments on someone else’s home, problem is making these lease payments to the owner is not affording me the opportunity to put anything into savings for a down payment or closing.
–Hamster on a wheel in La.
Hi…
I have been negotiating with CountryWide/BoA for over a year now to do a short sale. 3 of 5 offers have fallen through because they take so long to process. (45-60 days, hence so few offers) However, they will not approve a short sale if you keep paying, so this advice in not accurate for all banks
I think it is horrible that your credit score can effect whether you get a job or not, that is hardly fair practice in many cases, the employer see the score but do not know the story behind it such as a asshole phone company or faulty medical billing causing the drop.
I have been unemployed from the real estate marketing field for almost a year and a month. I have exhausted all of my savings and 401k, and am now left with nothing but what little bit of unemployment I received each week. I have been actively seeking work ever since being laid off from my job, and finally, out of desperation, accepted a job that would initially pay for two weeks of training via a temp agency, at which point the temp agency would stop payment, and I would go to commission-only with the said company.
During the second and final week of training (which, by the way, was “for [me] to see if the job is a fit for [me] and the company”), I realized this was not a position in which my financial situation I could afford to take. Virtually no one was coming in the retail establishment, and additionally, as I learned more about the way the company worked, I realized to start my own business (which is what I’d have to do) would cost more than I could afford. At that point, I informed the employer that the position was not a fit for me, thanked them, etc., etc.
The next thing I know, my employment benefits stopped. I learned that the temp agency had flagged me as “hired,” even though the payment from them was for the two weeks of training only, and for that specific position. Now I have no benefits whatsoever, and am at a complete loss as to what to do next.
I am behind on my mortgage loan payment, and even though I have been set up on a three-month deferral, I am wondering how I’m going to make even the minimum due at the first of the month. Does anyone have a recommendation on a company that would be able to help with a mortgage rate loan modification or refinance of some sort in my situation? I’ve been given the name of one particular site, http://www.help4homeowers.com which I’ve heard is a reputable company. Before taking any action or contacting any certain company, do any of you have any suggestions, similar stories, or information that may help?
Thank you!