Credit Ratings & Foreclosure

Your credit rating determines your eligibility for a variety of products and services, from new loans to insurance and even certain jobs. When you lose your home to foreclosure, the credit bureaus record this fact on your credit report and future lenders and creditors that review your credit history take your past foreclosure into consideration. Foreclosure has a derogatory effect on your credit scores and your future buying power.

Pre-Foreclosure Damage

Your mortgage lender will not seize your home unless you start missing mortgage payments. Missing mortgage payments and not catching them up leaves your lender with no choice but to foreclose on your home as a method of recovering its collateral and minimizing its losses. Because your payment history to each lender appears on your credit report and has a considerable impact on your credit score, the late payment notations you incur prior to losing your home leave your credit rating already damaged by the time the foreclosure actually takes place.

Foreclosure Impact

Once the lender completes the foreclosure process and reclaims your property, the foreclosure becomes a matter of public record and appears on your credit report. The damage a foreclosure does to your credit rating increases with your credit score. The higher your score when the property seizure takes place, the more damage your credit rating will incur. For example, MSN Money estimates that an individual with a credit rating of 780 will lose up to 160 credit points after foreclosure while an individual with a credit score of 680 would only lose up to 105 credit points.

Time Frame

A foreclosure, although derogatory, will not haunt your credit history indefinitely. Federal law dictates that amount of time any given negative entry can remain a part of your credit profile. According to the Fair Credit Reporting Act, the credit bureaus maintain foreclosure records for no longer than seven years. If your foreclosure remains on your report for longer than seven years, you can dispute the notation as "obsolete" with each of the credit bureaus still reporting it in an effort to have the damaging entry removed.

Post-Foreclosure Damage

Mortgage lenders sell foreclosed homes in an effort to minimize losses. Unfortunately, lenders do not always recover the full outstanding loan balance through the foreclosure sale. Should this occur, you still owe your lender the remaining balance and your lender can sue you for it if you do not make payment arrangements. Once your former mortgage lender wins a lawsuit against you, a civil judgment subsequently appears within the public records section of your credit file. Like the foreclosure itself, a civil judgment negatively impacts your scores. Civil judgments remain on record for your state's enforcement period. Thus, a judgment can appear within your credit history for ten years or longer, depending on your state's laws.