Can Foreclosure Affect Credit History?

Losing a house is typically blamed on foreclosure, but short sales and deeds-in-lieu are two other means a borrower can forfeit a house over to the lender or lender. In either of these three scenarios, the borrower’s credit score is affected. When a homeowner defaults on a mortgage the credit score plummets.

Definition of Foreclosure

A foreclosure is the forfeiture of the house in the borrower to the lender, who will then sell the house to recover some or all of the debt. A variation on the foreclosure is the deed instead of foreclosure, where the land deed is passed over to the lender, effectively avoiding foreclosure. Both foreclosure and deed in lieu remain on the debtor’s credit report for up to 7 years. Because they are recorded on the credit report for a long time and negatively impact the borrower’s credit score, the borrower might have difficulty getting new loans or credit for a while.

The Lender’s View

While bankruptcy appears the worst detriment to a individual’s credit file, a foreclosure may be more harmful. A bankruptcy is recorded on the credit report for ten years, but when it does not include the house, it might be less detrimental than a foreclosure concerning credit score.

Net Effect on the Credit score

Many variables go into determining a customer’s credit score. All delinquent payments have the potential to impact a credit score, but the severity of this delinquency will affect it otherwise. By way of instance, a payment that’s 30 days past due may decrease the total score from 40 to 110 points. Subtract another 20 or even 30 points for the payment which falls behind by 90 days. By comparison, a foreclosure (or its near equivalents, the short sale and deed in lieu) will reduce a credit score from 85 to 160 points. These ranges are based on variables which have credit history, credit limit and payment history, as well as the original credit score.

Not a Partial Payment

While it can seem that walking away from a debt through taxation, short sale or deed in lieu is likely to produce the borrower appear as never missing a payment, it does not. All three methods are handled as foreclosures, with regard to how they affect the credit score.

Damage Control

Despite having a foreclosure on a credit report and enduring the effect it can have on a credit score, borrowers can still operate to fix the damage. Borrowers must continue making periodic payments on other credit and credit cards. Borrowers who do not have existing loans must work to establish other kinds of charge. Additionally, consumers that have undergone foreclosure should communicate, in writing, together with the three credit reporting companies, explaining the situations for the foreclosure (for instance, illness or job loss). This communication will remain in the credit file for the length of the negative record.

If You Are Facing Foreclosure

Borrowers on the edge of foreclosure must work to prevent that, until the final process starts. By communicating openly with the lender, the borrower may discover other options which are available, like suspending payments due for a designated amount of time or extending the mortgage payment .

A Closing Note

Borrowers facing foreclosure or short sale might be tempted to allow the process continue along and seek a lease or lease arrangement elsewhere. However, landlords and rental agencies frequently look at applicants’ credit scores to ensure that the potential tenants will pay punctually.

See related