Article written By Jim Akin
A foreclosure is a significant negative event in your credit history that can lower your credit score considerably and limit your ability to qualify for credit or new loans for several years afterward.
Here’s what you need to know about foreclosure and how it can affect your credit.
What Is a Foreclosure?
A foreclosure occurs when a mortgage lender takes possession of a property from a borrower after the borrower fails to keep up with their loan payments. The lender is legally entitled to seize the property to recover as much of the loan amount as possible.
Here’s what to know about foreclosures and how they can affect your credit.
How Long Does a Foreclosure Stay on Your Credit Report?
A foreclosure entry typically appears on your credit report within a month or two after the lender initiates foreclosure proceedings. The entry remains on your credit report for seven years from the date of the first missed payment that led to the foreclosure. After that, it is deleted from your report.
Foreclosures have a considerable negative impact on credit scores, but as with all derogatory credit report entries, the number of points by which they’ll lower your score depends on many factors. These include what your score was before foreclosure and the number of negative entries on your credit report.
Foreclosures typically occur only after you miss at least four successive monthly payments (120 days of delinquency). Missed payments bring down credit scores more than any other negative entries, so your credit scores typically will have dropped significantly even before a foreclosure appears on your credit report. (If you are missing payments on other debts as well, this has a compound effect.)
How Do Lenders See a Foreclosure?
Arguably more significant than its effect on credit scores is the negative light in which many lenders view foreclosures. Every lender sets its own lending criteria, and there’s no universal rule about how a lender will treat a foreclosure in terms of this criteria. But it’s safe to say all lenders consider foreclosure a serious derogatory event in your credit history, second only to bankruptcy in terms of severity. Many creditors won’t even consider applicants with foreclosures on their credit reports, while others may disregard foreclosures that are several years old, if the applicant meets the rest of their lending criteria.
Can You Remove a Foreclosure?
A legitimate foreclosure entry cannot be removed from your credit report before its expiration date, seven years from the date of the first missed loan payment. At that point in time, the entry should fall off your credit report on its own. If it doesn’t come off your report after that date, or in the highly unlikely event that your credit report reflects a foreclosure that never happened, you can use the credit report dispute process to document the error and have your credit reports corrected.
A foreclosure is a difficult process that can have major negative impacts on your credit, but with time and good credit habits, it is possible to recover and one day buy another home of your own.