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A foreclosure remains on your credit reports for seven years from the date of the first missed mortgage payment that led to the event. Since a foreclosure occurs when you fail to repay a mortgage loan, lenders and credit scoring models typically treat it as a major red flag that's likely to affect your ability to attain credit or loans.
How a Foreclosure Affects Your Credit
The legalities of the foreclosure process differ from state to state, but every foreclosure is the culmination of a series of missed payments on a mortgage loan. Every missed payment damages your credit, and foreclosure hurts it further still.
Lenders typically issue notices of intent to foreclose—seize and resell a mortgaged property—only after a borrower has failed to make a loan payment for 90 days (that is, after they've missed three monthly payments in a row). The notice typically instructs a homeowner to bring the loan up to date within 30 days or lose their home, so by the time foreclosure begins, the borrower will have missed four monthly payments.
Every missed payment, or delinquency, is tracked in your credit report, and each has a significant negative effect on your credit score. Depending on your starting score, missing three or four mortgage payments could easily reduce your credit score by more than 100 points—an effect that can be magnified if you're also missing payments on other debts, such as credit card bills or car loans.
By the time foreclosure is finalized and appears on your credit report, accumulated delinquencies may have lowered your score so significantly that the foreclosure itself doesn't lead to a major loss in points. But a new foreclosure entry can hold your score down, even if you're able to maintain timely payments on all your other bills.
A foreclosure stays on your credit report for seven years from the date of the first related delinquency, but its impact on your credit score will likely diminish earlier than that. Still, it's likely to drag down your scores for several years at least.
Even after your credit score rebounds, however, a foreclosure on your credit report may hinder your ability to get a new mortgage. Some lenders won't even consider lending to applicants who have foreclosures on their credit reports. Other lenders may consider applicants with foreclosures in their histories, but only three or more years after the fact (as is the case with some issuers of FHA loans). Because a foreclosure is considered a mark of a risky borrower, lenders may charge extra fees or higher interest rates to borrowers who have one (or more) on their credit reports.
Improving Your Credit After a Foreclosure
If you've been through a foreclosure and are working to rebuild your credit, there are a number of steps worth considering, including:
- Review the circumstances that led up to the foreclosure and take steps to avoid repeating any missteps. Should you have had a larger emergency fund that could have covered more payments, for example? Were your monthly expenses excessive, or did you take on a higher mortgage payment than you should have? Unforeseeable circumstances may have played a role as well, but be realistic about how ready you were for them, and how you might better prepare for similar challenges in the future.
- Take the time to create a budget and then stick to it, to set aside regular savings and avoid unnecessary or excessive debt.
- Consider professional assistance. If you're stressing over creating a budget or working out a debt-reduction program, expert help is available. A certified credit counselor can help you work out a plan that will work for you. If appropriate, they can also help you devise a debt management program, through which they can negotiate with creditors to lower your interest rates and monthly payments. To find a reputable credit counselor, look for a nonprofit organization certified by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
- Be relentless about paying your bills on time, and adopt other habits that tend to promote credit score improvements.
- Track your progress by checking your credit scores and credit reports on a regular basis. You can request a free credit report from each of the credit bureaus (Experian, TransUnion and Equifax) once a year by going to AnnualCreditReport.com or check your Experian credit report for free every 30 days.
- Give it some time. With perseverance and patience, you'll see steady, if gradual improvements in your credit score over time.
Tips to Avoid Foreclosure
While your credit can and will recover after a foreclosure, the best response to foreclosure is to prevent it altogether.
Here are some tips to avoid the painful process in the first place:
- Be proactive with your lender. Before you miss your first mortgage payment (and strike a blow to your credit score), reach out to your lender and let them know you're having difficulty. They may offer you some options to help you work through a short-term loss of income or buy you time to sell your home. Depending on the nature of the property and how many payments you've already made on the loan, they may also offer to renegotiate a longer repayment term with lower monthly payments.
- Respond to communications from your lender. When debt starts to feel overwhelming, it's common for borrowers to let notices from lenders pile up in the form of unanswered voicemails and unopened mail. That's the worst possible response. Lenders don't want to be in the foreclosure business, but they can't work with you if you don't respond when they reach out. The conversations won't be fun, but they're better than losing your home.
- Use the U.S. Department of Housing and Urban Development (HUD) as a resource. HUD has a variety of helpful tips and strategies and offers access to counselors who can help you work out a plan for avoiding foreclosure.
Foreclosure is something no one—neither borrower nor lender—ever wants to go through. It's best avoided altogether, but if you can't get around it, you and your credit should eventually recover.