The Impact of Foreclosure on Credit Scores: Facts and Myths
Written by Dongmiao Cui   


As the recovering housing market wobbles, the foreclosure trend rarely ebbed. Foreclosure can damage your credit score badly and hence make your next loan expensive and even impossible. Although the record will not remain on your credit profile indefinitely, it will still take tremendous efforts to clear up the aftermath of your mortgage crisis. So it might be helpful–no matter whether you are already on the verge of foreclosure or still in a perfectly healthy financial condition–to know some of the facts and myths about the impact of foreclosure on your credit score.


Fact - The Damage

The amount of credit score points reduced by financial difficulties, including foreclosure, depends on the whole picture of an individual’s credit profile. The arcane credit scoring methodology precludes outsiders from precisely calculating the damages caused by foreclosures. However regarding the most commonly used FICO scores, the rule of thumb is that high scores can fall farther.

For example, if you start with a FICO score of 680, foreclosure may drop your score by approximately 100 points to 575-595. By contrast, if your current score is 780, foreclose can reduce your score to 620-640, by 150 points. As the example shows, higher credit scores can be affected more significantly by foreclosure. The same rule also applies to other negative information in your credit report.


Myth - The Scope

Typically Foreclosure remains in your credit report for 7 years. Yet many people tend to over-estimate the damaging power of foreclosures by thinking that forecloses will keep adversely affecting their FICO score for a very long time. In fact, not only that the negative impact of foreclosure will lessen over time, but more importantly FICO score can begin to rebound in just 2 years. The most effective remedy would be to keep good records in all your other credit obligations, so that your foreclosure will be isolated as the single negative record in your credit history. 

Another common misconception pertains to the alternatives to foreclosure, such as short sales and deed-in-lieu of foreclosure. Short sales occur when the borrower cannot pay the mortgage loan but the lender decides to sell the property at an acceptable loss.  In a deed-in-lieu of foreclosure, the borrower voluntarily gives the property to the lender and the lender will cancel the loan. Both alternatives avoid foreclosure; however are as bad as foreclosure in terms of regarding their impact on your credit score. FICO score, in particular consider these alternatives all the same with foreclosure.



 
Last Updated on Wednesday, 16 February 2011 14:07