How Does Foreclosure Affect My Credit?
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 Your 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. A foreclosure will show up in several places on a credit report. First, it might show under the “public information” section as a legal claim or lawsuit. Second, a foreclosure will appear as an entry for one or more accounts (your mortgage loan account is an “account” for credit reporting purposes).
In the account section, a foreclosure will appear as several months of “late pays”, appearing as 60, 90, or 120, which indicates the number of days late you were. Finally, the final event of foreclosure will report on the account as “RF” for “repo, foreclosure” or “CO”, for “charge-off”, meaning the bank charged off the loan without making further attempts to collect. What one commonly sees in an account leading up to foreclosure is the following: 30, 60, 90, 120, 120, 120, RF–and then the account goes dead. That sequence of entries tells a very clear picture of a borrower falling 30 days, then 60 days, then 90 days late, etc., then losing the home to foreclosure.
Your Right to Challenge Entries in Your Credit File
Credit reporting agencies are allowed by law to report your payment history on a credit report. You, however, have the right to challenge, and to have removed, derogatory information that is not accurate. Now, a short sale is not a foreclosure; similarly, a deed in lieu is not a foreclosure. As such, those foreclosure alternatives should not be reported as foreclosures. Similarly, the late pays must be reported accurately.
Now, there are credit repair agencies that can improve or remove derogatory entries, but they don’t really do anything that you can’t do yourself. You pay credit repairers for the convenience, and not because they are the only ones who can do it.
Credit can be repaired. Check out the forums at “Credit Info Center”–you can google that phrase. The forums will give you good guidance on how to improve or remove credit entries. The best inquiry dispute letter we could find anywere is here: Sample Credit Inquiry Dispute Letter, and the best letter to challenge incorrect derogatory information is this Sample Letter For Credit Repair | Credit Repair Sample Letter. When you challenge a derogatory with a credit reporting agency (Transunion, Equifax, or Experian), the agency must investigate or remove the item within 30 to 45 days.
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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).
You can view his Amazon Author Profile Here.