How does a foreclosure affect your credit report is an interesting question. Yet this is the most frequently asked question we get. The method of calculating a credit score (FICO Score) is proprietary information. What complicates the issue even further is that all credit information is calculated into the individual’s credit score as it is entered by creditors and is only updated whenever there is an inquiry.
The second most asked question is “How soon does the foreclosure go on my credit report?”. This depends on the lender but in the vast majority of cases, as soon as the homeowner is 90 days late (30 days in some states), the foreclosure info is filed with the credit reporting agencies. It will not be “reversed” by a short sale or a deed in lieu of foreclosure unless negotiated by the homeowner, and often that doesn’t work.
So with the foreclosure question, the homeowner’s credit score is first decreased by his late payments. Usually, he is also late on other bills because of his financial crisis and has additional late payments, collections, or even judgments that all lower his credit score. So if he had his credit score of 680 on a specific date before he started his personal financial decline, after he has been served with his foreclosure notice or even after the foreclosure is completed; his new score could be 420 or lower. He is usually shocked and dismayed, but the real problem is how much more interest the lenders want because of his low credit score. For example, an auto loan to an “A+’ credit customer could be 0% interest while for a “D” credit customer, it could be 11% or higher. What does that actually mean? It means that the “D” credit individual will pay $7,500 to $13,000 more for the same car as the “A” credit buyer! The collateral for the loan is the same car, so the “D” credit person is unfairly penalized for his credit situation.
The foreclosure’s actual point impact on an individual’s credit report is estimated to be from 125 to 175 points. The bigger impact is from the late payments on other bills which quickly mount up. The net effect is generally considered to be about a 240 point decline counting his late mortgage payments. Ironically, the lower your credit report to start, the less the impact of additional late payments, and if you get into the 400’s, it’s really hard to get much lower without almost trying to hurt yourself. Many of the items on any credit report can be removed over time. It requires persistence and it’s estimated that 30% of all items on credit reports are incorrect and can be removed just by an inquiry or showing a paid invoice. Also the credit score reduction for the foreclosure is reduced as time goes on, until it settles at a minimal deduction (50 to 75 points) after a few years.
It is absolutely untrue that once you have had a foreclosure you can never buy a home again, as we see people buying a new home within a year of losing theirs to foreclosure. There are even homeowners who legally buy homes within 30 days of their foreclosure using legal techniques with no cash and no credit.
Foreclosure victims, who want to do conventional financing in the future, will have to pay a higher interest rate (approximately 1 and a half to 2%) unless their down payment could be 10% to 20% of the purchase price. This sizable down payment can often be obtained from friends or family members and carried as a second mortgage or second deed of trust on the property.
I am often asked if doing a “Deed in Lieu of Foreclosure” or a “Short Sale” with the lender reports the same as a foreclosure. Unfortunately, depending on how the lender reports your foreclosure, it could stay on your report even if the lender accepts your deed to resolve the foreclosure. The foreclosure action does not have to be filed in the courts to be considered a “foreclosure” by the lender. If your lender accepts a “Deed in Lieu Of Foreclosure” or a “Short Sale, always them ask for a letter explaining they have accepted your deed in exchange for your home, and that they will retract or not put a foreclosure notification in your credit record. If they tell you they have to, it’s not true, ask for a Supervisor until you get your letter.