The Effects of a Foreclosure on a Credit Score

In December 2010, foreclosures were at some of the highest levels in years with 1 out of every 501 homes in foreclosure in the U.S., according to RealtyTrac. Foreclosure means your family will likely have to find a new place to live, but this could prove challenging, because your credit takes a massive hit after such a financial disaster.

Identification

The effect of foreclosure on a credit score depends in large part on where your credit was before the foreclosure. Average-to-poor scores tend to take less of a hit, because the credit history already has several negative items. The Fair Isaac Corporation looked at their data in 2010 and found that a foreclosure dropped a score of 780 to the 620-to-640 range and a score of 680 to the 575-to-595 range.

Time Frame

Like most bad items, foreclosure follows the seven-year reporting rule. Also, the foreclosure does the most damage during the first two years after the incident. After that, it is very possible to bring your score up enough to get a mortgage again. Some states allow lenders to go after a deficient balance---when the foreclosure sale does not pay for the original mortgage. The lender could pursue a public judgment and add yet another bad item to your report.

Misconception

Consumers often believe that a short-sale---where the borrower and bank agree to settle the mortgage for whatever the house can sell for---or giving the deed to the bank, called "deed in lieu of foreclosure," has a less noticeable impact on a credit score. This is not true. Although people that opt for a short-sale or "deed in lieu" may have good payment history leading up to this transaction, it is still a partial payment and a major mark on a credit report.

Tip

Before letting a foreclosure happen, consider getting help from the federal Making Home Affordable program. This program tries to modify a mortgage to fit the borrower's income and has no effect on a score as long as you enter the program current on your payments. You could also sell the house yourself if you have enough equity to pay back the mortgage. Commit yourself to paying bills on time, reducing credit card debt and building new credit, such as with a collateral-backed card known as a secured card, and you can probably get another mortgage in two to four years even with a foreclosure on your record.