How Will a Foreclosure Effect Your Credit Score? When Can I Buy Another Home?
Your credit score determines your eligibility for everything from mortgage loans and credit cards to insurance and some forms of employment. When you lose a home to foreclosure, that fact appears on your credit report and can be viewed by every business that pulls your credit. Foreclosure has an adverse effect on your credit rating and, as such, can significantly impact your future buying power.
Before Foreclosure – Late Mortgage Payments
It’s no secret that a late payment to a lender or creditor will hurt your credit score. What you may not realize, however, is that the longer you wait to pay your debt, the worse your credit becomes. When you can no longer afford your mortgage payments, late payments quickly add up and chip away at your credit rating.
Although only 35 percent of your overall credit score, your payment history is more significant in determining your credit rating than any other single factor. Thus, by the time your lender concludes foreclosure proceedings and seizes your home, you may already have incurred a poor credit rating due to late payments alone.
The mortgage company only reports your payment history and account status to the credit bureaus. It doesn’t report the foreclosure itself. Once the foreclosure process is complete, a record of the foreclosure will be entered into the public record for your county. Each of the three credit bureaus has district representatives that continually review courthouses in their districts for new public records. If a district representative can match the information in the public record for your foreclosure with the identifying information within your credit report, the foreclosure will appear within your file.
How Foreclosure Hurts Your Credit
A special section of your credit report contains only public records about you. Events such as bankruptcies, foreclosures and judgments are all examples of public records that may appear within this section. The credit bureaus only collect and maintain derogatory public records. Because of this, any public records you find on your credit report count against you.
A foreclosure can wreak havoc on your credit score – even after the damage done by repeated late payments. Like any form of credit damage, foreclosure’s negative impact is directly proportional to your credit rating before you began to accrue derogatory entries. Thus, an individual who started out with a credit score of 800 will suffer significantly more damage to his credit than an individual with a credit rating of 650. A foreclosure record can rob your credit score of up to 300 points.
Mortgage Deficiency After Foreclosure
If, like many homeowners in the wake of the recession, you’ve suffered a loss of equity due to declining home values, your home loan may be underwater. Individuals who are underwater on their mortgages owe more to their mortgage lenders than their homes are actually worth. Being underwater can exacerbate the credit damage you suffer following a foreclosure.
After your lender seizes your home, it will sell the property through a foreclosure auction or on the open market. The lender will price the home according to its fair market value and will often discount the property even further if it fails to sell in a reasonable amount of time. If the home sells for less than you owed on your mortgage loan, you’re responsible for the deficiency.
Mortgage Lender Lawsuits Impact Credit
A few states, such as California, have laws prohibiting mortgage lenders from pursuing homeowners for mortgage deficiencies after foreclosure. If your state has no such laws, your mortgage lender is well within its rights to file a lawsuit against you for the amount you still owe. Unless you can pay off the deficiency prior to the legal hearing, this will result in a judgment appearing on your credit report. Like foreclosure, a judgment is a derogatory public record and will damage your credit score even further.
Practicing good debt management skills in the future is the best way to repair your credit following a foreclosure. If you pay the creditors you maintain accounts with in a timely manner and keep your debts low, your credit score will gradually recover over a period of several years. Many individuals discover that, after two years, their credit scores have improved enough to apply for a new mortgage loan.