Homeownership is a huge responsibility that some people find challenging to manage. When foreclosure happens, homeowners don’t just lose their home, they also see a change in their credit score that can significantly impact their lives.
With so much at risk, it is important for homeowners to be fully aware of how their credit scores can be affected by foreclosure and how long these effects will last.
What is Foreclosure?
Purchasing a home often requires people to secure a loan from a bank, credit union or other lender. Once approved for a home loan, the borrower agrees to repay the loan by making monthly payments in a specified amount over the life of the loan. This amount and the loan term can vary based on a number of factors, including the lender, down payment and loan amount.
Foreclosure occurs when a homeowner defaults on their home loan. Basically, the lender takes ownership of the home following a homeowner’s failure to make timely mortgage payments. This is typically the result after four consecutive months or 120 days of nonpayment.
The foreclosure process varies from state to state, but homeowners can expect either a judicial foreclosure or non-judicial foreclosure. When there is a judicial foreclosure, the lender must file a lawsuit and get assistance from the court to foreclose. Non-judicial foreclosure allows the lender to foreclose without the assistance of the court, but there are steps that must be followed.
For both judicial and non-judicial foreclosure, the homeowner is notified of the proceedings.
How Does Foreclosure Affect Your Credit Score?
Credit scores are calculated using a consumer’s payment history, debt, types of credit accounts, credit history length and new accounts. The information reflected on a consumer’s credit report is what creditors use to make decisions about that specific person’s ability to repay a loan, manage their debts and more. That being the case, a person’s credit score is often the deciding factor when they are looking to get approved for an auto loan, get accepted for an apartment, or open a credit card account.
Since payment history factors into a homeowner’s credit score, all missed mortgage payments are reported on the homeowner’s credit report, and each one decreases their credit score. Similar to the missed payments, the entry of a foreclosure on a credit report is considered derogatory information. The effects of foreclosure on a consumer’s credit score include a decrease in credit score, difficulty opening new credit accounts and, depending on the lender and the lending criteria, consumers may also face issues getting approved for a new home loan.
There is no set number of points that a person’s credit score may decrease by, so even though the homeowner’s current credit score will drop, this doesn’t necessarily mean they will have what is considered poor or bad credit. However, the person’s credit score prior to foreclosure will play a role in their new credit score.
How Long Does Foreclosure Affect Your Credit Score?
Once entered, foreclosure is reflected on the homeowner’s credit report for seven years from the date that the first mortgage payment was missed. The foreclosure is removed when the seven years has lapsed. Should this information not be automatically removed after seven years, consumers are able to file a dispute and request that it be removed.
When taking out a home loan, borrowers are expected to be responsible and make their monthly mortgage payments in a timely manner. Homeownership is expensive, and some homeowners just aren’t able to keep up with the payments no matter how hard they try. There are consequences to foreclosure, and although it has a considerable impact on a homeowner’s credit score, the damage that can be done will not last forever.