Does a Foreclosure Permanently Affect Your Credit?

Any problems with loans or credit cards in your name will negatively affect your credit score. Credit problems aren't easily fixed, but rarely is the damage permanent. Home foreclosures have an impact on both your personal finances and credit history. But recovery is possible, at which time you can buy a home again.

Home Foreclosures

    Foreclosures are unavoidable if you get behind on the home loan payment. A bank or mortgage lender will force you and your family to vacate after three months of non-payment. The bank takes possession of the home and finds a new owner for the property. Auctions and real estate listings are commonly used to sell foreclosed homes. Buyers can often purchase a property for below market value.

Foreclosure and Credit

    Losing a home to foreclosure has a snowball effect. For starters, you lose equity when the bank takes the home. The bank reports the foreclosure to the bureaus, which results in a negative item and significant drop in credit score (160 points or more). Credit score decreases then trigger credit rejections and higher interest rates on credit cards and loans. Employers may not hire you with a foreclosure, and insurance premiums can increase due to a poor credit score.

Credit Damage

    Understand however, that credit damage from a home foreclosure isn't permanent. The slate's wiped clean after seven years when the bureaus deletes the home foreclosure. Removal of a foreclosure can cause an increase in credit score. But why wait seven years? People with prior foreclosures can boost their low score sooner by rebuilding their credit. This is a slow process that requires modifying credit habits. Previous homeowners may have a credit card, auto loan or another type of loan in their name. Never missing a payment and never making a late payment helps improve scores after foreclosure, as does keeping a low balance on credit cards.

Avoid Foreclosure

    Working with your lender to avoid a foreclosure helps avoid or lessen credit damage. Lenders can make modifications to mortgage loans to decrease payments and help you avoid foreclosure, or recommend forbearance in order for you to skip a few payments. Another option includes voluntarily deeding the house to the mortgage company and walking away, or selling for less than you owe if upside down on the mortgage loan.



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