Over the last decade, millions of Americans have faced the possibility of home foreclosure and this harsh reality has forced many to analyze the potential effects of how this could negatively influence an individual credit score. Of course, an adverse credit history can negatively impact your financial future, making it difficult (or impossible) to gain credit again and if a new home loans is given later, the total costs in interest rates will likely become more constrictive.
In addition to this, insurance rates will also become more expensive and prospective employers will have the opportunity to analyze your credit score (and the associated records) in order to determine whether or not you have a trustworthy character and are capable of being a responsible employee. For these reasons, the overall implications of a foreclosure can extend far beyond the possibility of being turned down for a simple credit card application down the line.
The Effects of Foreclosure
When looking at how foreclosures impact credit scores, the main figure borrowers should be watching is 720 – this is a significant line in the sand for many lenders and if your credit score falls below this level, your next home loan could cost you thousands of Dollars more in interest charges and transaction fees. So, here, we will look at the pros and cons that can be experienced if a foreclosure is seen.
The Bad News
In general, foreclosures will result in a credit score reduction of between 200 and 300 points. So, if you had a 720 credit score before your foreclosure (which considered a good score), this could drop to as low as 420 (which is considered a terrible score). The minimum FICO credit score is currently seen at 340, so the impact of a foreclosure can be detrimental for your financial future. To be sure, not all lenders base their decisions on credit scores but all tend to use similar scoring models, which factor in payment history, total debt, new credit applications, or other factors.
The Good News
Luckily, there are potential positives in these situations as well. While foreclosures can be found on your credit report for seven years (making it more difficult to get credit for larger purchases), a foreclosure will not destroy your credit score for life. As long as all of your other credit obligations remain in good standing, FICO scores can start to improve in 2 years or less. A foreclosure is a single event and, while negative, it does not create your entire credit history profile.
As long as you, as a borrower, are able to keep the foreclosure isolated, the negative event will be much less damaging in terms of your credit score than if the foreclosure could be seen in combination with other negative events, such as defaulting on credit cards, student loans or on car loans. Credit counselors can help in these situations, giving you advice on how to proceed with your other obligations and ensuring that your credit score shows improvement over time.