Your foreclosure and your credit

As soon as I hear the word ‘foreclosure,’ the first word that pops into my head is ‘credit.’ I think of what it does to a credit score and how it’s probably the worst item that could show up on a credit report. I also wonder what the homeowner really understands about his/her credit report and that foreclosure.

The bad news is: a foreclosure will stay on a credit report (in the Public Records section) for 10 years. It will kill any chances of you buying a new home for at least three years. Some banks will lend money to a borrower with a foreclosure that’s just over three years old (that’s three years from the date the foreclosure is finished; not from when it started). Also, a foreclosure will drop your overall credit score quite a bit.

For example, let’s say that your credit score was a strong 715 before your foreclosure. Then you had a hardship, and your home went into foreclosure. If you were just late on the mortgage and no other debts, that 715 score will probably drop to the mid-500 range. (There are several variables to consider here because your score is determined by the number of accounts you are late on, the amount of debt you carry, the frequency of the late payments, whether it’s an installment loan or a revolving loan and several more factors. So each credit report is unique. For the sake of this article, let’s just say the mortgage was the only account late.)

The good news is: it will not kill your credit report for life; you can start re-building your credit almost immediately, and it will not stop you from buying a home in the future. Many people came back after a foreclosure and get home purchase loans with a previous foreclosure. Most of those loans have been underwritten through FHA (Federal Housing Administration) lenders, offering excellent rates and programs and some with just three percent down payments needed by the borrower.

Lenders who lend to borrowers with a former foreclosure are very picky; they view this loan as a second chance, and they will probably shoot it down if they see anything late at all on the credit report or even a bounced check. So, if you’re trying to purchase a home after a foreclosure, your credit must be spotless.

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