When Does A Foreclosure Appear on Your Credit Report?
Credit reports are usually updated every month based on when your creditors send out their billing statements. If you miss a few mortgage payments, the bank might start the foreclosure process.
This includes declaring the loan as unpaid, filing for foreclosure, and setting up the sale of the home. This process of foreclosure generally kicks off after about four months of missed payments.
Once it begins, it might take a few months before it shows up on your credit history. Depending on when the bank’s billing cycle falls, it might pop up just a few days after the home is sold or even take up to a month.
In some places, the foreclosure process can drag on for months or even years, while in others, it moves faster. Usually, the longer the foreclosure takes, the longer it will be before it shows up on your credit report.
Timing of a Foreclosure
Foreclosures do not happen right away. Lenders have to follow a process that takes some time and involves several legal steps that are required by law. Before the foreclosure starts, there is a stage called pre-foreclosure, which is when the borrower begins missing payments. During this time, borrowers get late fees and notices and have a chance to bring their accounts up to date.
After missing three mortgage payments, about 90 days, the pre-foreclosure phase might start. This means the borrower has not paid the loan and is in default. The lender will then send a certified letter to the borrower, telling them that they have 30 days before foreclosure steps begin.
In some places, when this letter is sent, the borrower’s name goes on a public list of people facing foreclosure. The time it takes to complete foreclosure varies a lot from state to state.
In some states, the lender must prove the borrower did not pay, which can take months because courts are busy and the process involves a lot of back-and-forth. In other states, foreclosure can be approved in just a few weeks.
Once a home is foreclosed, the people living there are removed, locks are changed, and the home is often put up for sale in a public auction. If nobody buys it at the auction, the property goes back to the lender, who then tries to sell it privately. This is what’s known as real estate-owned (REO) property. [1]
How Does a Foreclosure Affect Your Credit?
Going through a foreclosure is one of the most difficult experiences a person can face. Losing your home is hard enough, but you may also endure the effect of the foreclosure on your credit score.
When a foreclosure happens, your credit score usually drops by at least 100 points, maybe even more. The exact impact really depends on what your score was before the foreclosure. If your credit score was high to begin with, you could see a bigger drop compared to someone who already had a lower score.
For example, if your score was around 680 before the foreclosure, it might drop by 85 to 105 points. But if your score was higher, like 780, you could lose between 140 to 160 points.
Experts say that if you already had late payments on your record, those would have already lowered your score significantly, so the foreclosure might not make as big of a difference in those cases. [2]
How Long Does Will a Foreclosure Stay on a Credit Report?
If you have missed mortgage payments or have already gotten a foreclosure notice, you might wonder how long it will stay on your credit report. A foreclosure stays on your report for up to seven years.
However, this period does not start when the lender begins the foreclosure process. Instead, the seven-year countdown starts from the date of the first missed payment that led to the foreclosure.
So, even though the foreclosure may not show up on your credit report right away, the seven-year period is counted from when you first missed a payment. After seven years from that date, the foreclosure should be automatically taken off your credit report. [3]
The Waiting Period After Foreclosure
After experiencing a foreclosure, there are specific waiting periods before you can qualify for different types of home loans. For a conventional mortgage, you usually need to wait seven years.
On the other hand, if you are looking into USDA or FHA loans, the typical waiting period is three years. For VA loans, you will need to wait between two to three years. If you can demonstrate that your foreclosure was due to a significant hardship like losing your job or dealing with high medical expenses, you might be able to shorten the waiting time.
For conventional loans, this could bring the wait down to three years, while USDA and FHA loans might only require you to wait one year. No matter what, it will likely take some time before you can buy another house. [3]
Short Sales
You might be able to stop a foreclosure with a short sale, where you sell your house for less than the amount you owe, or by giving the property back to the lender through a deed in lieu of foreclosure.
This can keep the foreclosure from showing up on your credit report and might help reduce the time you need to wait before you can apply for a new mortgage. However, do not count on this to fully protect your credit score; the impact on your credit will still be noticeable. [3]
Recovering From A Foreclosure
If the foreclosure process moves forward, your credit score is likely to take a hit, along with the missed payments. This can be tough, but the impact does not have to last forever.
Positive Financial Choices
FICO scores are more influenced by recent financial activity, so while a foreclosure will appear on your credit report for seven years, you can still work on improving your credit over time by making positive financial choices.
Foreclosure does not always happen because of poor money management. Sometimes, life throws unexpected challenges like losing a job or having to pay large medical bills, which can make it difficult to keep up with payments.
Overdue Bills
If you have made some financial mistakes, it is a good idea to take a close look at your finances and see where you can make changes to get back on track. Getting caught up on other overdue bills and fixing any mistakes on your credit report can also help improve your credit score.
Paying your bills on time is one of the best things you can do for your credit. Whether it is for credit cards, a car loan, or student loans, setting up automatic payments can help make sure you do not miss a payment. Keeping your credit card balances low is also important, as using too much of your credit limit can hurt your score.
New Debt
If you have a large balance, think about using a balance transfer card or a debt consolidation loan to help lower it. And while taking on new debt might seem like a quick fix, it can make things harder if you struggle to keep up with your existing payments. It takes time to recover from foreclosure, but with patience and consistent effort, your credit score can improve. [3]
If you want more information about your foreclosure, contact Richard West today.
FAQs
Foreclosures usually show up on your credit report a few months after the process starts. Sometimes it happens right after your home gets sold, or it could take a few weeks more.
Typically, after you miss about four months of mortgage payments, the foreclosure process starts.
Yes, the time it takes for a foreclosure to happen can vary a lot between states. Some states have longer legal steps that slow down the process, while others are faster, which changes when it shows up on your credit report.
Foreclosures can make your credit score drop by at least 100 points. The exact drop depends on what your score was before the foreclosure. If you had a higher score, the drop could be bigger compared to someone whose score was already lower.
A foreclosure sticks around on your credit report for up to seven years. This period starts from when you first missed a mortgage payment that led to the foreclosure.
Yes, usually you need to wait seven years to get a regular mortgage after foreclosure. But, you might qualify sooner for USDA, FHA, or VA loans, especially if you can prove that the foreclosure happened due to a serious hardship.
You could try a short sale. This might stop foreclosure from showing up on your credit report, but they can still hurt your credit, just not as much as a foreclosure would.
No, sometimes losing a job or big medical bills that make it tough to keep up with mortgage payments. Even with good money management, these unexpected events can lead to foreclosure.
Yes, paying your bills on time is one of the best ways to rebuild your credit after a foreclosure. This includes keeping your credit card balances low and handling other debts to show future lenders that you can manage credit responsibly.
Sources:
[1] Akin, J. (2021, February 10). What Is Pre-Foreclosure? Experian. https://www.experian.com/blogs/ask-experian/what-is-a-pre-foreclousure/
[2] Loftsgordon, A. (2023, July 19). Which Is Worse for Your FICO Score: Bankruptcy, Foreclosure, Short Sale, or Loan Modification? www.nolo.com. https://www.nolo.com/legal-encyclopedia/which-is-worse-your-fico-score-bankruptcy-foreclosure-short-sale-loan-modification.html
[3] How Long Does a Foreclosure Stay On Your Credit Report? (n.d.). U.S. News. Retrieved August 16, 2024, from https://money.usnews.com/loans/mortgages/articles/how-a-foreclosure-affects-your-credit-card-report
