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When you borrow money to finance a home purchase, the home you buy acts as collateral on the loan. If you're not able to make your monthly mortgage payments, your lender may take your home through a legal process called foreclosure.
Mortgage lenders and servicers generally report foreclosures to the three major credit bureaus (Experian, TransUnion and Equifax), which will then add it to your credit reports. As long as the foreclosure is legitimate, it cannot be removed from your credit reports until it has run its full seven-year credit reporting lifecycle.
When Will a Foreclosure Fall off My Credit Report?
Foreclosures, like other negative marks, won't be on your credit report forever. In fact, a foreclosure must be removed seven years after the date of the first late payment that led to its default. In credit reporting terms, this is called the date of first delinquency, or DoFD.
A foreclosure that's accurately reported will be removed from your credit reports no later than seven years from its DoFD. This deletion process will kick in automatically at the credit bureaus and do not require a reminder. If, however, the foreclosure is somehow incorrect, you can alert the credit bureaus by going through the dispute process.
How Much Does a Foreclosure Affect My Credit?
Scoring systems used by both FICO® and VantageScore® consider foreclosure a derogatory event. And while the impact to credit scores will vary by consumer, it's safe to say that a foreclosure can be very problematic.
The foreclosure itself, as well as the late payments that preceded it, will have a major impact on your credit scores—especially if your scores were high to begin with. If your score is on the high end of the scale, you may see a much more significant impact than someone whose credit score is lower.
In addition to a foreclosure's potential impact on your credit scores, it may also cause you to face consequences due to mortgage policies published by Fannie Mae and Freddie Mac. You may not be eligible for either a Fannie Mae- or Freddie Mac-backed loan for several years if you've gone through a foreclosure. This penalty is called a mandatory waiting period, and it may freeze you out of the homebuying market for as long as seven years regardless of how well your credit scores have recovered.
How Can I Rebuild My Credit After a Foreclosure?
When it comes to rebuilding your credit reports and credit scores after a foreclosure, one thing is universally true: Time is your greatest ally.
Even if you did nothing except wait for time to pass, your credit scores would improve simply because late payments and foreclosure have less impact on your scores as they age. And when the foreclosure eventually is removed from your credit reports, it will no longer have any negative impact at all.
In the meantime, you can do other things to help the rebuilding process.
- Check your credit reports and scores regularly. You can check your credit scores for free in a variety of ways, including getting it through Experian. When checking your credit reports, review what might be dragging down your scores, such as a high credit card debt load or frequent applications for new credit.
- Avoid any further negative credit reporting. The best way to do this is to make all your payments on time, without exception. Never missing a payment means you won't have to worry about derogatory credit entries.
- Pay down or pay off your credit card debt. FICO® and VantageScore® credit scoring models both consider your credit utilization ratio, which measures your credit card debt relative to your total credit limit. The more credit card debt you have on your credit reports and the closer your balances are to your credit limits, the higher the credit utilization ratio and the more it can hurt your scores. Shoot for a ratio under 10%.
Boost Your Scores
Experian recently introduced a free service to consumers called Experian Boost®ø that can help you get credit for household bills you pay every month. Boost allows you to add utility and cellphone accounts to your Experian credit report, in most cases giving you an instant FICO® Score☉ increase.
While you can't have a legitimate foreclosure removed from your credit report, you can take steps now to ensure your credit gets back on track. Determine which methods will work best for you, and start helping your credit recover as quickly as possible.