Having your home foreclosed on is one of the worst things that can happen to your credit rating. The blemish on your credit score will remain there for seven years or more. Only bankruptcy, which stays on your credit report for ten years, has such a long lasting effect.
The laws on foreclosure vary depending on which state the property is in but, in most US states, if a homeowner hasn’t made their mortgage payments in 90 days, the foreclosure process begins. At this point the foreclosure is reported to the credit reporting agency and the homeowner has 90 more days to come up with the unpaid mortgage payments including any late fees. If they’re unable to pay by this date, the house becomes the property of the bank.
All of this affects your credit score. Your credit score is a number used by banks and other lenders to determine how likely you are to pay your bills on time. The most commonly used score is FICO, which ranges from 300 points to 850. A ‘good’ credit score is generally considered anything above 760. Anything under 600 is considered risky.
The method for calculating credit scores isn’t available to the general public. However, some people who have been through the foreclosure process have reported that their FICO credit score dropped by anywhere between 200 and 300 points. The actual foreclosure is almost certainly worth fewer points but, each time a mortgage payment is late, the borrower’s credit score drops. And, if the homeowner is making late payments on other items such as car or student loans, the score will drop even more.
Once a foreclosure happens, it will be virtually impossible for most people to get approved for new credit lines, especially a future mortgage, for the next 24 months. And because your credit score has dropped so much, you will most likely pay a higher interest rate on any loans you do get.
On the bright side, though, a foreclosure won’t wreck your credit forever. It will stay on your report for at least seven years but, if you pay your bills on time, the impact of the foreclosure on your credit rating will drop as time passes. You may also be able to increase your credit rating by making inquiries about any items that seem incorrect. And it isn’t absolutely impossible to qualify for a new mortgage afterwards. Raising your credit score and being able to provide a down payment on the new house will increase your chances of being approved.