Do Foreclosures Damage Credit?

You have some options when you cannot make your mortgage payment, according to the Federal Trade Commission (FTC) website. Some banks are willing to work with you if you call them and explain your situation. You may qualify for a loan modification if you meet certain requirements. Sometimes there is no way out, and you must foreclose. The loss of a home is devastating, and there are consequences for your credit rating too.

Definition

Foreclosure is the process through which you lose your house if you stop paying the mortgage. The house acts as collateral for the mortgage loan, so the bank or finance company can take it if you default on repayment. Typically foreclosure proceedings begin after three to four months of non-payment. The delinquent payments damage your credit even before foreclosure occurs. CNN Money staff writer Les Christie warns that being 30 days late on a house payment drops your credit score by 40 to 110 points, depending on the status of your other accounts and your beginning score. A 90-day late payment pulls the score down by 70 to 135 points.

Credit Damage

Foreclosure causes your credit score to plummet 80 to 160 points, according to Christie. Lenders also see the loss of your home when they pull your credit reports to evaluate applications. A low credit score and major negative item like a foreclosure marks you as a bad risk for future loans, credit cards and other accounts.

Effects

You suffer several different negative effects from a foreclosure. Creditors will likely turn down your applications for new accounts or offer you loans and credit cards with high interest rates. Insurers look at your credit files when evaluating you for policies, and a foreclosure often subjects you to higher premiums. According to Loretta Sorters from the Insurance Information Institute as stated on CNNMoney.com, you will pay about $60 more per year for home insurance and $115 in additional auto insurance premiums with damaged credit.

Time Frame

Foreclosure stays on your credit report for the same time frame as most negative items, like late payments, financial judgments, collection accounts and auto repossessions. The Equifax, Experian and TransUnion credit bureaus report this discrediting information for seven years. The worst impact occurs during the first few years. You offset it over time by handling current accounts responsibly and establishing a new pattern of on-time payments for other bills.