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As if the pain of losing your home weren't enough, a foreclosure does significant harm to your credit and remains on your credit report for seven years. Here's the lowdown on how foreclosure affects your credit, and how to rebuild your credit in its wake.
What Is a Foreclosure?
A foreclosure can occur if you fail to keep up with your mortgage payments and the lender exercises their right to seize your house (or other mortgaged real estate) to recover what you owe them. A foreclosure typically occurs only after you miss at least four successive monthly payments (120 days of delinquency).
Foreclosure typically begins with a court filing by the lender, and it can end with your forced removal from the premises. The amount of time between a court filing and finalization of a foreclosure varies according to local law and the type of foreclosure proceeding that applies.
How Long Does a Foreclosure Stay on Your Credit Report?
A foreclosure entry remains on your credit report for seven years from the date of the first missed payment that led to the foreclosure. After that, it is deleted from your report.
Foreclosures, like other negative credit report entries, have adverse impacts on credit scores as long as they remain on your credit reports. A foreclosure hurts your scores most in the first months and years after it appears on your credit reports, and its effect on your scores diminishes over time.
How Do Lenders See a Foreclosure?
Lenders view a foreclosure as a serious negative event in your credit history, second in severity only to bankruptcy. Some mortgage lenders may refuse to work with you as long as a foreclosure appears on your credit reports. Every lender sets its own lending standards, however, so other lenders may be willing to consider your mortgage application just a few years after a foreclosure is reported, if you meet the rest of their lending criteria.
Can You Remove a Foreclosure?
If it's accurate, a foreclosure entry cannot be removed from your credit report before its expiration date. If a foreclosure entry remains on your credit report past that time, or if your credit report somehow lists a foreclosure that never happened, you have the right to use the credit report dispute process to document the error and have your credit reports corrected.
How to Improve Your Credit After a Foreclosure
Foreclosure has negative consequences for credit scores, and they're often most severe for individuals who had high scores to begin with. Rebuilding your credit is possible, but it can take time and discipline. Here are some proven techniques:
Embrace Good Credit Habits
Practicing good financial habits is the key to building credit—and rebuilding it after a foreclosure.
- Pay your bills on time. Payment history is the single biggest factor in determining credit scores. Making debt payments on time adds new, positive information to your credit reports, which helps build up your scores.
- Minimize credit card balances. Using credit cards and making timely payments on them each month can help build credit. Contrary to popular myth, however, there's no benefit to carrying card balances month to month. In fact, paying off card balances in full every month helps build credit by reining in your credit utilization rate—and it saves you interest charges, to boot.
- Save for emergencies. If you lack a sufficient emergency fund, any unexpected expense can cause financial chaos, tempting you to take on new debt or skip bill payments. Experts recommend setting aside enough to cover at least six months' worth of regular expenses, but if that's too daunting, start with smaller goals—put aside enough for a few weeks' groceries, then a month's rent and build from there. A great way to do this is to set up automatic savings deposits from each paycheck. That way the money is stashed before you see it, and you reduce the risk of spending it.
- Be patient. There aren't any quick fixes for credit damaged by foreclosure. Credit repair companies that promise to rebuild your credit fast can't do anything for you that you can't do for yourself. Their methods don't always work and often leave customers in deeper debt than they started with. The most effective way to improve your credit is to work on it yourself and rebuild your scores steadily over time.
Track Your Credit
Keeping an eye on your credit information can be helpful in moving on after foreclosure. Doing so lets you know where you stand in the immediate aftermath, shows you when your credit begins to rebound and reinforces your good habits as your recovery gains momentum.
Automated credit monitoring can notify you of changes to your credit reports and scores, document score improvement and alert you to unauthorized use of your credit, which can be a sign of fraud or identity theft.
The Bottom Line
Foreclosure is a difficult ordeal with significant negative consequences for your credit, but with time and persistence, you can move beyond it. Eventually, you can get your credit in good shape for another mortgage application. It's always wise to check your credit score for free from Experian before you apply for any loan, so you'll know where you stand with the lender.