Facts About Credit Scores and Foreclosures

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In 2023, foreclosures were up 10 percent from 2022 and 136 percent from 2021. According to the U.S. Foreclosure Market report, the 2023 foreclosures filings were 357,062. This triggered a significant credit hit for many people.

Foreclosure can be heart-wrenching. It destroys lives emotionally and financially. But how bad and how long does a foreclosure hurt a credit score? What are your options?

How Much Does Foreclosure Affect Credit Score?

A foreclosure will lower your credit score by at least 100 points. But, how much the score drops depends on how high it was before the foreclosure. The higher it is, the more you lose.

For example, if you have a 680 credit score before the foreclosure, expect to lose 85–100 points. However, if your credit score is 780, it will drop 140–160 points after foreclosure.

But keep in mind that late payments lower a credit score. So, if you’re late or missing payments on your mortgage, the foreclosure will not matter as much. That’s because you’ve already damaged your credit.

How Long Does Foreclosure Remain on a Credit Report?

A foreclosure affects your credit score for seven years. But that doesn’t mean it actually drops off your credit report after seven years.

You must have the foreclosure removed. This involves disputing the foreclosure. It requires you to provide evidence of the foreclosure timeline.

Providing documentation that the seven years have passed since foreclosure can help you repair your credit.

This will give you a better chance of obtaining financing for a house or vehicle.

Foreclosure vs. Bankruptcy for Credit Score

A foreclosure remains on your credit report for seven years, but bankruptcy stays on it for 10 years. Now, on the surface, that makes the foreclosure sound better. But that’s not necessarily true.

Foreclosure causes a significant drop in a credit score. Plus, you will lose your home. Many lenders won’t even look at someone who’s had a foreclosure. So, it will be difficult to obtain a mortgage.

But with bankruptcy, you can usually keep your home. The bankruptcy stays on your credit report it eliminates all unsecured debt. You probably won’t be able to obtain a credit card for a while.

Those in financial distress probably already have a meager credit score. Bankruptcy should only slightly lower an already low score.

There are credit cards designed to help you re-establish credit after bankruptcy.

If you’re trying to decide between foreclosure and bankruptcy, speak to a lawyer and discuss the best course of action.

Short Sale and Credit Score

A short sale and a foreclosure are similar regarding how much your credit scores will drop.

If you haven’t missed a payment before the short sale, that event will still cause damage to your credit. But if you avoid owing a deficiency, the short sale might not affect your credit scores as much.

Loan Modification and Credit Score

Whether a loan modification affects your credit score depends on how the lender reports it. It also depends on your other credit.

The lender must report it as “paid as agreed” for the modification not to affect your Fair Isaac Corporation (FICO) score.

But if the lender reports the modification as “paying under a partial payment agreement” or anything else, it indicates you’re “not paying as agreed.”

Although “not paying as agreed” will affect your credit score, it won’t be as bad as a foreclosure or short sale. It is also better to have a loan modification than to declare bankruptcy.

How to Prevent Foreclosure

If you’re having a problem paying your mortgage, contact your lender. Don’t ignore the problem. Lenders don’t want to foreclose. They have options to help.

Read your loan documents and see what rights you have if you can’t make full payments on time.

Contact the U.S. Department of Housing and Urban Development (HUD). They have free or low-cost housing counseling. They can help you understand your options and the law.

They will represent you in negotiations with the lender, and HUD also will help you organize your finances. Contact them at their website. Or you can call them at [phone].

Instead of paying a foreclosure prevention company, save your money for the mortgage. These for-profit companies will charge you a large fee to negotiate with your lender. This fee usually equals two or three months of your mortgage payments.

Go directly to your lender or HUD, and you'll receive free or at least discounted help.

Can Another House Be Bought After Foreclosure?

There are several ways to qualify for a mortgage after a foreclosure. One is to wait out the seven years. Do the hard work to build creditworthiness.

Even with a bad credit history or low credit score, you may qualify for a loan from the Federal Housing Administration (FHA).

And, finally, you might qualify for a subprime mortgage. But these will have high-interest rates. If you still have financial problems, the rates may put you back where you started.

You may find a company claiming they can stop your foreclosure immediately. These companies are recovery scams. If you sign a document appointing them to represent you, you might be signing over the deed to your home. You could become a renter in your own home.

Foreclosure Significantly Hurts Credit Score

A foreclosure can hurt your credit for seven years. It doesn’t just go away on its own; you must provide evidence it’s been seven years and you’re clear.

A foreclosure may be worse than a bankruptcy in the eyes of a lender. So talk to a lawyer to decide which way is right for you.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.