Foreclosure and Messy Credit Scores

“Foreclosure” is a frightening word for a number of reasons. Topping the list? If you’re unable to make your mortgage payments,  you’ll lose your home.  However, the misery doesn’t end there. Foreclosure ripples out and affects your credit score, which can hurt your chances of qualifying for a new loan—or another home—in the future.

Foreclosure and your Credit Score

A foreclosure appears on your credit report and leaves a dingy residue that can seriously damage your credit score.  A mortgage is considered one of the safest forms of credit but is also typically one of the largest debts a person ever has, so when you stop making payments, or are late on a payment, you will see a large drop in your scores.  While it’s impossible to pinpoint exactly how many points your credit score will plummet after a foreclosure, it might be enough to drop your score from the prime to subprime range. A consumer could drop credit tiers following a foreclosure. [It depends] on the consumer’s credit history prior to the foreclosure and if there are other negative factors contributing to a drop at the time of foreclosure. And while some of the negatives will diminish over time, a foreclosure will linger on your credit report for seven years from the filing date.

Rebuilding

Getting your credit score back on track after a foreclosure boils down to following a simple philosophy: Keep it positive.  Because negative information is deleted eventually, you can rebuild your creditworthiness if you take control of your debts and build a history of positive payments that will continue to appear after the foreclosure disappears.

Applying for Credit

Applying for credit after a foreclosure is tricky.  A foreclosure in your credit report is typically looked at by lenders as very negative. It may not be as bad as bankruptcy, but not paying your mortgage and losing your house is very close.  If you apply for credit cards, department store cards, or other loans, you may find lenders aren’t as willing to extend credit as they once were. And when you do get approved, you’ll likely face higher interest rates, higher annual fees, or more onerous terms than you would have before your foreclosure.

Buying a Home

If you think you’re back on solid financial footing and want to buy again, jumping back into the homeownership saddle is near impossible shortly after a foreclosure. All mortgage loans have a waiting period after a foreclosure before you’re able to apply for another loan:

• Conventional loans require a seven-year waiting period.
• Loans backed by the Department of Veterans Affairs require a two-year waiting period.
• Loans backed by the Federal Housing Administration require a minimum of one year.

It’s tough to rebound from a foreclosure and become a home buyer again, but the devastating effect of defaulting on a loan has a more immediate (and negative) impact on your credit score.

-From Realtor.com