How Long Does Foreclosure Stay on Your Credit Report?

A foreclosure is a negative mark that remains on credit bureau reports for up to seven years.  During the seven-year period, lenders that conduct credit inquiries will view the foreclosure as a negative item and may hesitate to approve you for a loan, credit card, or other financings.

How Does a Foreclosure Affect Your Credit?

When an existing homeowner with a mortgage fails to make the required mortgage payments, the lender may initiate foreclosure proceedings. The foreclosure process is a legal action that a mortgage lender uses to recoup the debt and may vary slightly based on the state laws.

The first negative information that appears on your credit report is entries regarding late payments or missed payments that are reported to the credit reporting agency. 

You can expect the foreclosure process to last several months as the lender officially retakes possession of the property.

According to FICO’s credit scoring model, consumers with higher credit scores should expect a more dramatic decrease in their credit score than those with average or fair credit scores. 

Experian, one of the three primary credit reporting bureaus, explains that someone with good credit may experience more than a 100-point reduction in their credit score as several missed loan payments appear on their credit history.

Keep in mind that the adverse effect on your credit score may worsen if you have other outstanding debts appearing on your credit histories, such as delinquencies related to credit cards, personal loans, or student loans.

Further, Experian stated that the accumulated bad credit inquiries during the foreclosure process might have already lowered your credit score so substantially that the finalized foreclosure credit report entry has a comparatively minimal effect.

How Long Will a Foreclosure Affect My Credit?

A foreclosure will remain visible on your credit history for seven years from the first mortgage-related account delinquency.

The credit reporting bureau, Equifax, explains that only bankruptcy will typically have a more damaging impact on a consumer’s credit score than a foreclosure will.  

A new (recent) foreclosure will result in a bad credit score regardless of whether you remain current on other debts.

The Consumer Financial Protection Bureau (CFPB) reports that during the seven years when a foreclosure appears on your credit reports, it will remain very challenging for a consumer to obtain approval for a subsequent mortgage for a home purchase.

The CFPB explains those with a past foreclosure who work to improve their credit may qualify for a new mortgage after several years. The Federal Housing Administration (FHA) has also traditionally offered home loans to prospective borrowers with bad credit.

Typically, FHA lenders will require that three years have passed since a borrower was the subject of a foreclosure. In some instances, FHA lenders have shortened this period to two years if it can be shown as a “one-time, uncontrollable” occurrence.

Those with a prior foreclosure may also consider applying for a subprime mortgage. Based on the perceived risk involved with prospective borrowers, subprime mortgage lenders will usually impose much higher interest rates that reduce the overall affordability of the loan.

How Can I Fix My Credit After a Foreclosure?

Improving your credit after a foreclosure is challenging because you will likely experience difficulty finding lenders that are willing to approve you for types of financing that give you the opportunity to offset your poor credit history. 

Use CreditStrong

One excellent option to rebuild credit is pursuing a credit builder loan from CreditStrong, a division of an Austin, Texas-based community bank. CreditStrong offers installment loan options that allow you to build credit.

After approval, unlike a traditional installment loan, the loan funds are placed in an FDIC-insured savings account and remain there throughout the term of the loan. Meanwhile, you make affordable, set monthly payments toward the loan balance.

During the term of the loan repayment, CreditStrong will regularly report the loan activity to Equifax, Experian, and TransUnion, the three major credit bureaus, which will likely boost your credit score.

After making all the required loan payments, the funds that have remained in the savings account are made available. Here, you can simultaneously rebuild your credit and your savings account, which may also accrue interest during the loan term.

Check Your Credit Report for Any Errors

A Consumer Reports study showed that roughly 30% of respondents identified an error when they reviewed their credit reports. Common mistakes included improperly reported personal information, misassigned credit accounts, and others that may hinder credit scores.

Fortunately, consumers are now eligible to receive a free copy of their credit report from the three primary reporting agencies each year. The credit bureaus all have multiple ways for consumers to dispute any information contained within their reports that appear incorrect.

Be sure to clearly describe the potentially incorrect information and gather any supporting documentation that might be necessary. In most cases, the credit agencies will issue a formal response to your dispute within a month.

It is recommended that consumers diligently check their reports each year as part of a comprehensive credit-related plan.

Don’t Miss Payments

The two primary organizations that calculate consumer credit scores today are FICO and VantageScore. Both companies have developed formulas that consider a variety of factors that ultimately form your credit score.

Payment history represents the largest single consideration that influences your credit score. Your past payment history equates to roughly 35% of your overall FICO score calculation and 40% for VantageScore.

Consumers should remain organized to better ensure that timely payments are made on all credit accounts. Today, there are many different electronic applications available that will automatically remind you of payment due dates.

Most companies will also allow you to set up automated monthly payments for your account that will better ensure you are not late.

Keep Your Credit Utilization Ratio Low

Your credit utilization rate or ratio is another factor used in the calculations that generate your credit score. Your credit utilization rate, which is expressed as a percentage, compares the amount of the credit you currently are using against your overall available credit limit.

Lenders consider credit utilization rates as a tool for determining creditworthiness, as those with high rates of utilization are considered greater credit risks. This is one reason why “maxing out” a credit card is generally discouraged.

Keep in mind that utilization rates apply exclusively to revolving credit accounts — most commonly, credit cards. The basic formula for calculating the rate is:

Credit Utilization Rate = Total Current Debt / Your Total Available Credit

For example, assume you have Credit Card A that has a $2,000 balance and a $5,000 limit and Credit Card B that has a $1,000 balance and a $5,000 limit. Here, you are currently using $3,000 out of a total of $10,000 available, which translates to a 30% rate.

You should try to keep your credit utilization ratio below 10% for best results in improving your credit score.

FAQs

Can a Foreclosure Be Removed From a Credit Report?

A foreclosure will remain on a consumer’s credit report for seven years from the date of original delinquency when the entry will be automatically removed from your credit history. Unless it is reported inaccurately, you cannot have a foreclosure removed from your report.

If you notice an erroneously reported foreclosure on your credit report, follow the process for formally filing a dispute with Equifax, Experian, or TransUnion.

There are some rare instances where a consumer might challenge an “unlawful” foreclosure. One unlikely scenario involves a lender that hastily moves through the foreclosure process without proper regard for procedures.

Examples of wrongful or unlawful foreclosure might also involve a lender that fails to comply with the Servicemembers Civil Relief Act (SCRA) that prohibits default judgments in actions involving active-duty military members or lenders that demonstrate “predatory” lending practices.  

Can You Buy a House With a Foreclosure on Your Credit Report?

A foreclosure remains on your credit report for seven years, which will pose challenges for those seeking approval for a home mortgage — particularly for the first three years. After three years, the most likely option is obtaining a Federal Housing Administration (FHA) loan.

To qualify for an FHA loan three years after a foreclosure, a borrower must likely restore their credit score to at least 500 and have a 10% cash down payment available or have a 580-credit score and have 3.5% on-hand for a down payment.

Active military members or veterans of the U.S. armed forces might qualify for a Department of Veteran Affairs (VA) loan for a home only two years after a foreclosure. 

VA loans typically require no down payment; however, applicants usually must achieve a 580 minimum credit score.

Conventional mortgage lenders often deny mortgage applicants that have had a foreclosure in the past seven years. Some conventional lenders will consider borrowers after three years if the foreclosure was attributed to divorce, a medical emergency, or a similar issue.

How Will a Short Sale Affect My Credit Score?

According to Equifax, a short sale typically results in a credit report entry indicating the mortgage was “not paid as agreed” or a similar description that is commonly interpreted as being equivalent to or nearly as detrimental as a foreclosure.

A short sale typically occurs when the borrower has failed to make multiple mortgage payments. Here, the bank temporarily suspends its lien on the property, which allows the debtor to sell the property and generate proceeds for the lender.

The property’s sale price is often insufficient to pay off the entire remaining mortgage balance. The lender may choose to pursue collection efforts for the remaining debt (deficiency); however, many state laws either prohibit, restrict, or impose limitations on such collection activity.

Similar to bankruptcy, a short sale, foreclosure, or deed-in-lieu of foreclosure all adversely impact the borrower’s credit score and the resulting credit report entry will remain visible for seven years.

Losing your home to foreclosure will likely have a devastating interim effect on your credit score. Fortunately, those who commit to improving their financial circumstances can restore their credit to an average score or better in just a couple of years.

A comprehensive strategy for improving bad credit involves reestablishing accounts and making timely payments, remaining well below your credit limits, annually reviewing your credit reports for any errors, considering a credit builder loan, and other opportunities.

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