As we noted in Foreclosure Law, foreclosure is the process by which a bank or lender takes possession of collateral used to secure a loan. Put another way, foreclosure happens to a homeowner when he or she doesn’t pay their mortgage. And in What Is a Deficiency Judgement in a Foreclosure | Debt After Foreclosure we discussed that cancellation of debt is a likely outcome following a foreclosure.
1099 After Foreclosure |
Foreclosure devastates credit–the only greater “derogatory” on a credit report is a bankruptcy. If you follow your FICO scores, you would tend to see a drop in the 120 to 150 point range. The amount of the drop will vary depending on the other items on your credit report. A person with good credit might fare quite well, while a person with average or low credit will likely find himself in the high 400s or low 500s–the “radioactive” zone.
However, a credit score is an estimate of one’s creditworthiness today, and so as derogatories (a major blemish on a credit report is called a derogatory in credit parlance) pass into the past, the effect of derogatories lessens. Your score will tend to rise over time.
So, before a foreclosure happens to you, you should do some pre-foreclosure credit planning–you may likely not have borrowing power in the two year period following your foreclosure. So, if you absolutely must borrow to buy a car in the next year or two, you’ll get a better rate before the foreclosure goes on your credit report. In fact, after a foreclosure, you might not be able to borrow for a car loan at all. Of course, good fiscal health dictates that one should never borrow to buy a car–but that’s another topic.
How To Improve Credit After Foreclosure
Foreclosure is a big hit to a credit report–don’t compound it by creating other derogatories. Keep everything else clean on your credit report. That means paying bills on time, and avoiding requests for new credit. A request for new credit creates an “inquiry” on your report, which lowers your score by a small amount. Make a slew of inquiries, and you might lower your score by 20 points or so.
Credit reporting agencies are allowed by law to report your payment history on a credit report.
Foreclosure devastates credit–the only greater “derogatory” on a credit report is a bankruptcy. If you follow your FICO scores, you would tend to see a drop in the 120 to 150 point range.
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Michael Spadaccini is the author of 8 books on self-help legal matters such as, Ultimate LLC Compliance Guide: Covers All 50 States (Ultimate Series), Ultimate Book of Forming Corps, LLCs, Partnerships & Sole Proprietorships, and Ultimate Guide to Forming an LLC in Any State, Second Edition (Ultimate Series).
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