Effect of Foreclosure on Credit Score

road sign for foreclosureQ: What are the typical effects of foreclosure on your credit score?

A: Unfortunately, this is a situation that is becoming all too common since jobs have started moving offshore. First I would like to point out that whether you have a foreclosure, short sale, or deed in lieu of foreclosure, the impact on your credit score should be about the same. Aside from your credit score, obviously each of these approaches has their financial advantages and disadvantages depending on your situation. So regardless of which of the aforementioned applies to you, here’s what you need to know:

1. There is no magic number
There are some “experts” that will try and give you an exact number, but the truth is no one knows the exact effect of foreclosure on credit scores. This is because the FICO scoring formula is kept secret, so without knowing it, we can only estimate.

2. For those with score of 750 to 800+
If you currently have a high credit score around this range, a good estimate is that the effect will be around a 200 point drop after the foreclosure. However if you’ve already fallen behind on payments and have credit cards that are maxed out, it’s probably unlikely your score is still this high, even if it was before.

3. For the typical person in foreclosure
Typical assumptions would be that the person going into foreclosure have already exhausted or nearly exhausted their other lines of credit, including credit cards and loans. Under these circumstances, the credit score has already taken a hit and after a foreclosure, they should probably expect a point drop of around 100 to 150.

Buying a Home After Foreclosure

There are new guidelines in place now by Fannie Mae for getting approved for a mortgage:

After a foreclosure, you have to wait 5 years before you can be approved. For years 5 to 7 after, there are additional restrictions; 10% or more downpayment, 680+ credit score, and it must be a personal residence. There are situations known as “extenuating circumstances” which might allow you to buy again after 3 years. These include things like illness, severe injury, a spouse’s death, etc. which may have been a major cause in your foreclosure.

After a deed-in-lieu of foreclosure, you will have to wait four years. If there are “extenuating circumstances” involved, you may only need to wait two years. A 10% downpayment will also be required.

After a short sale, the waiting period is two years.

Rebuilding Credit After Foreclosure

While its true that the effects of a foreclosure on your credit score won’t be as bad as a bankruptcy, you will take 7 years for it to fall of your report. Therefore during those 7 years, it will be nearly impossible to hit the 800s, but if you play your cards right you can build up your credit score back to the mid to high 700s during this period.

In order to rebuild your credit as quickly as possible, stay on top of your other lines of credit. That means if you have credit cards that aren’t maxed out and you can afford to pay them, then you should keep paying on them. The same holds true with car loans, etc. Basically, you want to keep open and preserve your other lines of credit, because it will be difficult to open up new accounts during the first couple years after your foreclosure.

If you’ve defaulted on your other lines of credit – such as your credit cards – and want to start fresh, then you may want to consider a secured credit card. Since you typically can’t charge beyond your security deposit, typically anyone can get approved for this type of card, regardless of their credit score. True, it will cost you a bit in fees, but a good secured card will be report your account to the credit bureaus. If you’re looking for one, then I recommend you check out this section:

How to rebuild credit using secured cards

 
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These include things like illness, severe injury, a spouse’s death, etc. which may have been a major cause in your foreclosure.