Consumer Comeback Blog

How A Foreclosure Can Affect Your Credit Score

Having a bank foreclose on your home will devastate your credit score, but you can recover from the scar on your credit record with a little time, patience, and hard work. According to RealtyTrac, a company that tracks home trends in America, there are currently just over 2.2 million homes in the United States that are in some form of the foreclosure process. In fact, the rate of foreclosures has continued to increase throughout the recession and only recently shown signs of slowing down. Currently foreclosures are up by 4% from the previous quarter to a record of one out of every 139 homes in foreclosure which have continued to devastate people’s credit scores in their wake. But, a foreclosure does not have be the end of your financial life. Your credit score can be rebuilt.

What Is A Bank Foreclosure?

A bank foreclosure occurs when a bank takes back a borrowers home. The bank reclaims ownership of the home because the borrowers have fallen behind on or stopped making their mortgage payments to the bank. Usually, after three missed mortgage payments, banks will begin the foreclosure process which consists of sending the borrower written notification that he or she is in default on the loan. Each state governs their own foreclosure process differently. The law of each state requires that the bank send the borrower sufficient warning while they are not making their mortgage payments and notice before the foreclosure process takes place.

How Much Will A Bank Foreclosure Affect My Credit Score?

There are a lot of factors that are incorporated into making a person’s credit score, and each of the three credit bureaus have their own proprietary formula for calculating each person’s credit score. Every person’s credit score is based on their entire history of using credit and debt over the past seven years, and a person’s entire credit picture is considered when they are assigned a credit score by one of the three main reporting agencies and the Fair Isaac Corporation which runs the FICO credit score. Because of the credit bureaus’ secretiveness and every borrower’s unique situation, it is nearly impossible to determine exactly how much your credit score will drop as a result of a foreclosure. But, most consumers can expect a drop of between one hundred to two hundred points or more on his or her credit score following a foreclosure. Usually a foreclosure is combined with other financial problems which can compound the pounding a person’s credit score can take.

How Your Credit Score Can Recover From A Foreclosure

Rebuilding your credit score after a foreclosure is important if you want to borrow money at some point in the future at a decent interest rate. In most cases, a foreclosure will stay on a person’s credit score for seven years, and they primarily affect your credit score during the first two years after the bank seizes your home. So, like most things, time will heal all wounds. And, your foreclosure will too pass from the eyes of your future creditors if you are patient. The best way to rebuild your credit score after a foreclosure is the tried and true method of paying your bills on time every month. Eventually, you can also apply for a new credit card that you pay off in full and use it to make small purchases. By paying off your balance in full every month, you can slowly rebuild your credit score as you begin to pay your debts off.

Having a bank foreclose on your home will undoubtedly damage your credit score, but you can recover from the blemish on your credit record. Rebuilding your credit score will take time and patience, but it can be done.

Hank ColemanHank Coleman is a writer, entrepreneur, and professional in the government sector. He holds a Bachelor’s Degree in Business Administration, a Master’s in Finance, and is currently studying for his Certified Financial Planning (CFP) credentials. Be sure to follow him on Twitter @HankColeman.

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