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Is a Credit Report Affected by Foreclosure?

By Oliver Darraugh

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Published: 08Nov2009
Word count: 508
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With so many people losing a home to foreclosure all over the country, most want to know how their credit report will be affected. The credit reporting system was originally created by the Fair Isaac Company and in addition to calculating a person's credit score, the information is confidential. The score changes as things happen, which makes the system somewhat complicated. In other words, purchases, late payments, and even inquiries are reported instantly.

Regarding foreclosure, if a homeowner has not made the mortgage payments for 30 to 90 days, the information will be reported to the three reporting agencies, with each late payment causing the score to decrease. For the homeowner falling behind on house payments, this typically means other debts are suffering too, some that have likely gone into a collection or judgement status. Therefore, if a person's credit were checked prior to falling behind in payments, the credit report would show one number but once foreclosure procedures begin and the information is reported, the report could be pulled and show a completely different and lower number.

Watching a credit score go from 650 one day, which is good, to 450 the next due to foreclosure is disheartening. Most people feel sick, especially when it hits them that because of the low credit score, lenders are going to increase interest rates on other bills. For instance, if the individual had an automobile loan with 5% interest, foreclosure could increase the rate to 10% or more, all because of the foreclosure being reported. This means even if the situation is out of the homeowner's control, they are penalized.

Without doubt, foreclosure would impact the credit score but to what degree would depend on each person and situation. Although a tough scenario, having a lowered score does not mean that credit, even the purchase of a home in the future is impossible. In fact, some people have gone through foreclosure and been able to purchase another home within a year.

However, to accomplish this, these people are going to pay higher loan interest rates and some lenders may even require a more substantial down payment to qualify for a loan. The challenge is that the amount of down payment may need to be borrowed from a family member, sometimes by them taking out a second mortgage. Typically, the low credit score would remain low for several years until the foreclosure is settled.

Usually, a person's credit report would be lowered anywhere from 100 to 140 points once a foreclosure is reported. Even so, being late on other debts can be worse. Some people believe that a "deed in lieu of foreclosure" would keep the foreclosure from being reported, which is untrue. By law, a foreclosure would remain on the report for seven years but it could remain up to 20 and this is public information. This is why when trying to clean up credit history it is so important. Just because a reported foreclosure or other debt issues *should* come off in a specific amount of time, this may or may not actually happen.

Oliver Darraugh is a private real estate investor based in the Midlands. He is a former estate agent and mortgage consultant who's been involved in 100's of real estate transactions. He is the founder of Sell House Fast, the online leader for repossession debt negotiations in the UK.

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