Foreclosures can wreak havoc on your credit profile. Not only do they have the potential to drive your credit scores downward, foreclosures on your credit reports can be a major obstacle when you’re ready to purchase another home.
Under normal circumstances, a foreclosure may stay on your credit report for up to seven years. But there are a few potential ways to see a foreclosure removed from your report sooner—especially if the account contains inaccurate information.
What is a Foreclosure?
Mortgages are secured loans. The home you are buying is your asset. It serves as collateral to help you secure financing. If you don’t keep up with your monthly payments, there’s a danger that the lender could seize your home to satisfy the debt you owe. When you default on a mortgage and the lender starts legal proceedings to take your home away, the process is known as a foreclosure.
How Long do Foreclosures Stay on Your Credit Report?
In general, you need to fall at least 120 days behind on your mortgage payments before a lender will begin foreclosure proceedings on your home. Once the proceedings begin, the mortgage lender or servicer will typically report the foreclosure to the three major credit reporting agencies—Equifax, TransUnion, and Experian.
After the lender reports a foreclosure notation to the credit bureaus, it will often show up on your credit reports within 30-60 days. According to the Fair Credit Reporting Act (FCRA), the federal law that regulates the credit reporting agencies, a foreclosure can stay on your credit report for up to 7 years.
The 7-year clock doesn’t start the day the lender begins foreclosure proceedings. Instead, it starts counting down with the first late payment that leads to the mortgage default. This is known as the original delinquency date.
What Happens in Foreclosure?
Foreclosure is a legal process that occurs when a homeowner defaults on their mortgage payments, leading the lender to repossess the property. Here’s what typically happens during foreclosure:
Missed Payments: It starts with the homeowner missing several mortgage payments. The lender will usually attempt to contact the homeowner to discuss the situation and offer options to resolve the delinquency.
Notice of Default: If payments remain unpaid, the lender may issue a “Notice of Default” (NOD) to the homeowner, informing them of the impending foreclosure proceedings. The NOD typically provides a specific time frame to catch up on payments.
Foreclosure Auction: If the homeowner doesn’t bring the loan current within the specified period, the lender can schedule a foreclosure auction. At the auction, the property is sold to the highest bidder. If the property doesn’t sell, it may become “real estate-owned” (REO) by the lender.
Eviction: After the sale, the new owner or the lender may initiate eviction proceedings to remove the former homeowner from the property.
Foreclosure has serious consequences, including the loss of the home and a negative impact on the homeowner’s credit. It’s crucial for homeowners facing financial difficulties to seek assistance and explore options to prevent foreclosure, such as loan modifications or refinancing.
How does a Foreclosure Affect Your Credit Score?
In terms of credit scoring, a foreclosure is a major derogatory event. When a foreclosure appears on your credit report it may cause severe credit score damage. Yet, although a foreclosure is certainly negative, it’s difficult to pinpoint the exact number of points your credit score may decline whenever one is added to your report.
Scoring models from FICO and VantageScore won’t simply lower your score by a specific number of points when new negative information appears on your credit report—foreclosure or otherwise. Rather, a scoring model will consider all of the information on your credit report collectively and assign your credit score from there.
For example, if your credit score is high and your report is clean aside from the late payments that proceed your foreclosure, the addition of this new negative information might have a major impact on your credit score. Yet if your credit report and score is already in rough shape, a new foreclosure might not impact your score as much as you expect.
To help you visualize the fact that credit actions can impact different people in different ways, FICO provides a few examples. The table below shows how mortgage late payments or a foreclosure might affect the credit scores of three different people with FICO Scores of 680, 720, and 780.
| Starting FICO Score | 30-Day Late on Mortgage | 90-Day Late on Mortgage | Foreclosure | |
|---|---|---|---|---|
| Person A | 680 | 600-620 | 600-620 | 575-595 |
| Person B | 720 | 630-650 | 610-630 | 570-590 |
| Person C | 780 | 670-690 | 650-670 | 620-640 |
