Foreclosures & Credit

Your credit rating comes from data in your TransUnion, Equifax and Experian credit bureau files. This trio of bureaus sells credit reports to lenders, employers and insurance companies making decisions about you, and your credit score is based on the same data. Negative things, like late bill payments, repossessed cars and house foreclosures, make you unattractive to creditors, insurers and hiring professionals.

Definition

A mortgage is a secured installment loan, meaning that you pay a set amount each month for a specified length of time, and your repayment is guaranteed by the house you purchased. Foreclosure happens if you cease making payments and your lender goes through the legal process to take possession of the property. It sells your home and holds you responsible for any difference between the selling price and your loan balance, which is know as the deficiency.

Time Frame

Mortgage lenders do not foreclose as soon as you miss one payment, although every late or skipped payment appears on your credit reports and brings your score down. The Home Loan Learning Center explains that banks usually tack a late fee onto your account when your delinquency goes past 15 days. You are expected to catch up the full amount, including fees, once you miss two payments. Lenders consider foreclosure once you have missed at least three payments. If you lose your home, your credit reports show the foreclosure for seven years.

Effects

Foreclosure is a very serious credit blemish because it shows that you neglected an important financial obligation. It figures into the "payment history" part of your credit score, which is 35 percent of the total, according to the MyFICO scoring firm. The foreclosure causes its worst damage within the first few years, so offset it by paying all your other obligations on time and keeping the lowest possible debt load. Lenders pay more attention to recent activity, so a near-perfect current record offsets an old foreclosure.

Considerations

Banks prefer not to foreclose on a home because they incur costs which they must pursue you to recover, and they must invest time and effort into selling the property. The Bankrate website advises calling your lender as soon as you know you cannot make your payment. Some banks let you skip a payment and make it up in installments over several months. Your lender may modify the loan by rolling your delinquency into the balance and adjusting the terms to accommodate it. Explain your situation and let the bank explain your options.

Alternative

Some lenders agree to a foreclosure alternative called a short sale. The bank allows you to sell the house for a predetermined amount that is less than what you owe on your loan. It accepts that amount as payment in full and does not pursue you for the deficiency. A short sale hurts your credit because it reflects a settlement rather than paying the entire loan amount. Some banks agree to report your mortgage to the credit bureaus as paid in full if you negotiate that term up front.