Your bank reports all of your payment history and account data on your mortgage to credit bureaus, which then use this data to help calculate your credit score. When the bank forecloses on your property because you cannot pay the mortgage, the bank will report this to the credit bureaus as well. Foreclosure significantly lowers your credit score.
Initial Effects
As soon as the bank reports the foreclosure, you will see your credit score drop anywhere from 85 to 160 points, according to FICO, which computes and publishes credit scores. This in addition to the effects that the missed payments have already had on your credit score. The exact number of points your score will drop depends on what the rest of your credit file looks like. In general, the higher your score was before the foreclosure, the more it will fall. In addition, the shorter your credit history and the fewer other credit accounts you have, the more your score will fall.
Long-Term Effects
The record of the foreclosure remains on your credit report for seven years after the bank forecloses and will impact your score as long as it is on your credit report. However, the foreclosure will affect your score less as time passes. This is because your credit score weights recent data more heavily in calculations. Therefore, you will be able to bounce back from the foreclosure in as little as two years if you use credit responsibly going forward.
Other Home Losses
Foreclosure is not the only way that a homeowner can end a mortgage. Two other common situations are a short sale and deed-in-lieu of foreclosure. As long as the lender reports that you did not fully pay your mortgage, even if you initiated the process, your credit score will look the same as if you went through foreclosure. A short sale or a deed-in-lieu of foreclosure still negatively affect your credit.
Buying Again
Having a foreclosure on your credit report makes it more difficult for you to buy a home again in the future. You will need to spend at least a few years building up your credit history before you try to get another mortgage. On the heels of your foreclosure, keep paying all of your other bills on time. Pay special attention to any other installment loans you have, such as an auto loan or student loan. Now that you don't have a mortgage, these other installment loans have a stronger effect on your credit. You should also try to keep each credit card balance to no more than 30 percent of the credit limit on that card.
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