At some point, we all experience financial difficulty. Sometimes, these difficulties can result in missing mortgage payments. After a certain number of payments are missed, your lender can start foreclosure proceedings, which allows them to take possession of your home if the process is finished.
A foreclosure doesn’t just result in the loss of your home, however. It also impacts your credit score and remains on your credit report for seven years (from the date of first missed payment). After seven years, the foreclosure should automatically be removed from your credit report.
How Does a Foreclosure Impact Your Credit Score?
While state law governs many specific aspects of how foreclosures proceed, the federal government does have restrictions on when the process can start. In most cases, lenders can’t start foreclosure until you’re at least 120 days delinquent on your mortgage payments. There’s a good chance you’ll miss at least four payments before a lender notifies you that foreclosure is on the table.
The impact of a foreclosure on your credit score, however, starts before the official notification. Missing even a single mortgage payment can have an impact on your score. Depending on your current score, one skipped mortgage payment has the potential to drop your FICO score by 100 points or more. In fact, the higher your current score, and the cleaner your record, the bigger your drop if you miss a mortgage payment.
Each subsequent missed payment leading up to the actual foreclosure impacts your credit score as it goes along. One of the reasons a foreclosure is such a big deal is due to the fact that each of your missed payments has a cumulative effect in lowering your score.
By the time the foreclosure is complete, it’s possible to lose 150 points or more from your credit score.
How Long Does a Foreclosure Stay On Your Credit Report?
Your foreclosure remains on your credit report for seven years, dated from your first related payment. Once seven years have passed from that first missed payment date leading to the foreclosure, the offending account should be automatically deleted from your credit report.
If your credit report still shows a foreclosure after the seven years have passed, you can file a dispute with the credit reporting agency. They have to investigate the situation within 30 days to determine if you have a point. If you can show that your first delinquency was reported more than seven years ago, that should be enough to have the item removed from your credit report.
Reduce the Credit Score Impact of a Foreclosure
However, even though your late payments and foreclosure remain on your credit report for seven years, the passage of time reduces the impact on your credit score.
If you want to reduce the impact of the foreclosure, develop other credit habits that can show a pattern of general improvement. Make other payments on time, including your credit card and personal loan obligations. You can also reduce your debt, paying down any credit cards.
These moves will be more recent, and “count” for more than a past transgression as the foreclosure recedes in your financial rear view mirror.
Eventually, you’ll even be able to get a home. Depending on the type of loan you get, you might be able to qualify for a home loan as soon as three years after the foreclosure. Some lenders might require you to wait longer before getting a new mortgage, but if you’ve made progress and can show your situation has changed, you might be able to get a new home loan sooner than you thought.
Yes, a foreclosure stays on your credit report for seven years. However, that doesn’t mean that you won’t be able to do anything with your finances for that entire time period. A foreclosure is a serious issue that will limit your money choices for a few years, but the further you move away from the time of the foreclosure, the less the impact will be.
As long as you show responsible habits with credit moving forward, making an effort to keep debt levels low and pay your other bills on time, your credit score will start to improve and eventually it will recover.