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What Does a Foreclosure Do to Your Credit?

Published by Nanni on Saturday, August 25, 2012

Photo credit by BasicGov

There is no doubt that being in getting your home foreclosed is one of the worst financial situations you can be in. And to add to the problem, a foreclosure can do some pretty nasty things to your credit rating, which can leave you in a financial bind for several years to come. When avoiding foreclosure isn’t possible, you are most likely wondering what exactly it will do to your credit report and just how bad it will be. The trick is that the Fair Isaac Company, who founded the credit score system, keeps this information confidential. However, looking at how credit ratings and scores work, one can get a basic idea of how foreclosures will affect one’s credit.

The first thing that you should know is that a foreclosure will affect your credit very quickly. This is because a statement of foreclosure is filed anywhere from 30 to 90 days after a missed mortgage payment. The actual amount of time will vary depending on the location of the home, but it will never be more than three months. Because foreclosures come from one or more missed mortgage payments, the credit of the homeowner has already been affected by the location when the missed or late payments were reported.

Once a foreclosure appears on a credit score, it immediately and dramatically affects the person’s credit score and overall rating. Not only will lenders be much more wary of giving you any credit, but a foreclosure takes a great deal of points away from your credit score. Although the exact amount of points taken due to a foreclosure is unknown, it is estimated to be approximately 125 – 175. This could turn a credit score of 600, which is fairly good, and make it just above 400, which is considered quite a bad credit score. Along with the missed or late mortgage payments, and any other bills that have been late in the meantime, the total points that are usually deducted from a credit score and that are associated with foreclosure is usually about 240, which is a big hit for anybody.

The other biggest factor that people want to know when it comes to foreclosures and their credit is how long the foreclosure will affect their credit. Foreclosures are one of the worst things that can appear on a credit score. They are actually right under bankruptcy in the list of possible blemishes. And just like bankruptcy, foreclosures stay on a credit report for up to 7 years. However, points can be earned back onto a credit score, meaning that the deduction of 240 points will not show up on a credit report for the full 7 seven years.

Many people think that once they land in foreclosure that they can never buy a home or get another loan again. This is absolutely not true! While foreclosure is certainly not an ideal situation, it is something that you can come back from and once again be a homeowner someday. There are many financial and real estate professionals today that specialize in just this type of thing.

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