A default on a mortgage loan means that you did not honor the terms of the loan agreement for one reason or another. Often the reason for default is an inability to make the required mortgage payments. Once you default on the loan, the lender will pursue a foreclosure on the property and this can impact your credit in a number of ways.
Credit Scores
A foreclosure will appear on your credit report as a public record and this will negatively impact your credit. A FICO score ranges from 300 to 850. The higher the score, the better your credit rating. Thirty-five percent of that score reflects your payment history. A foreclosure indicates that you defaulted on one of your financial obligations. According to MSN Money, a foreclosure will drop your credit score anywhere from 85 to 160 points, depending upon what your FICO credit score is at the time the foreclosure appears on your credit report.
Significance
A foreclosure can impact your credit score in another way. After a foreclosure, a lender will sell the home. The difference between what the lender gets for the home and how much you still owe on it is called a deficiency. Some states are recourse states, meaning the lender has the right to sue you to obtain a deficiency judgment against you. This judgment is also a public record and will appear on your credit report. How much a judgment lowers your score depends upon the other items contained within the report.
Credit Report
A foreclosure doesn't just impact your score the moment it appears on your credit report. It continues to negatively affect your credit for many years to come. Under the Fair Credit Reporting Act, a foreclosure can remain on your credit report for seven years. In addition, if a judgment is obtained against you, that judgment can also remain on your credit report for up to seven years from the date issued by the court. If you live in New York, however, a paid judgment can remain on the report for up to five years.
Statute of Limitations
In addition to adversely affecting your credit for seven years, a foreclosure can haunt you in other ways. Judgments have a statute of limitation all their own. If the lender obtains a deficiency judgment against you, the lender may be able to seize your bank accounts or garnish your wages many years after the judgment was issued. So although you may not have any money or property right now, the lender could still come after assets and cash you acquire in the future. In Ohio, for example, the statute of limitations on judgments is 21 years.
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