How Foreclosure Affects Your Credit Score

One question that many borrowers face is what affect a foreclosure will have on their credit scores. It should be apparent to many people what will happen when they begin missing monthly payments on their largest loan, but there are many other issues to think through. Some foreclosure victims may witness a substantial decline in their credit score after foreclosure and an inability to qualify for any loan for several years, while others will be able to escape with almost-decent credit and an ability to borrow more after only a few months to a year. These differences can often be a deciding factor between being able to purchase a new home very quickly or being forced to save up a large amount of money for a down payment and end up with an exorbitant interest rate.

Every borrower's credit score is based on their entire history of using credit (up to seven years), and the whole picture will be looked at by the rating agencies when assigning a score. If a homeowner has a lot of other bills that they are paid up on, and credit lines that are paid off or on time, the foreclosure may not have a large effect. It may only cause a small decline in the total score because one negative mark will be covered up by numerous positives. Combined with a lot of late payments on other loans, though, a foreclosure can definitely bring down a credit score. This is why it is so vital for borrowers to do what they can to stay on top of all of their bills while in foreclosure, in order to keep up their positive credit history as much as they possibly can.

The same concept applies with how much credit the borrowers in foreclosure have in total. If the mortgage is their only bill and they are delinquent from month to month, they can anticipate a huge drop in their credit rating. But if they have other credit lines like auto loans, credit cards, and so on, that they are paying as well, a foreclosure can be just one negative mark on an overall positive credit report. It is still a negative mark, obviously, but not as bad as it could be. Again, the overall picture is more important than just one piece of the puzzle. But if the entire picture is just the mortgage payment and it is in default or foreclosure, then that will carry much more weight.

The vast majority of homeowners in foreclosure are concerned with maintaining their credit-worthiness and keeping a good score. They usually desire the ability to borrow money again in the future at a low interest rate, whether it is to finance a new home, replace a beat up car, or simply purchase things. For many of them, a foreclosure is simply an unavoidable result of a financial crisis. But for others, facing foreclosure causes them to reconsider their use of credit and creates a desire to become independent of credit cards and borrowing. For these foreclosure victims, having poor credit may prevent them from spending outside of their means, and it will provide them with an escape from the debt trap that so many consumers become victim to.

Foreclosures often end up as a depressing out-of-control hurricane of unpaid bills, collection calls, lawsuits, repossession, eviction, and worse. Many borrowers frantically try to get back in good graces with their creditors, while others realize the situation for what it is: a business decision on whether they can afford to pay their bills or not. Instead of agreeing to repayment plans they will never be able to stay on top of, these borrowers are opting for strategic default, walking away from their debts. Homeowners in foreclosure should very carefully take into consideration the uses of credit in their lives and if the rewards are worth the trouble.