Does a Foreclosure Affect Your Credit?

A foreclosure affects your credit, and could lower your score by 100 points or more depending on your situation.

A foreclosure may happen when a homeowner no longer pays their mortgage, or otherwise defaults on the terms of their loan. The lender can take legal action to initiate the foreclosure, repossess and sell the home and recover some or all of the debt.

Beyond the stress of losing a home, foreclosure has long-term implications for your credit and finances.

How long does a foreclosure stay on your credit?

A foreclosure remains on your credit report for up to seven years. You might notice a reduced impact to your score over that time, especially if you otherwise maintain good credit habits.

During this seven-year period, though, it can be more difficult to qualify for new loans, credit cards or even rental housing. Banks and lenders treat foreclosure as a serious indicator of risk, which means a higher interest rate for you or an outright denial of your application. 

Can I repair my credit after a foreclosure?

Yes, you can repair your credit after foreclosure. It’ll take some time and consistent effort. Here are the steps to take:

Review your credit reports

Get copies of your credit reports from the three major credit bureaus (Equifax, Experian and TransUnion). You can get these online, for free, on a weekly basis. Check them for any errors, such as incorrect or incomplete contact information or erroneous collections or loans. If you find inaccuracies, you can dispute them with the credit bureau online, by phone or via mail.

Consider a secured credit card

If you don’t have other open credit lines, consider applying for a secured credit card or credit builder card. This type of card requires a cash deposit that acts as your credit limit. To help rebuild your credit, you can use the card for small purchases and pay the balance off in full each month. 

Report your rent payments

If you’re renting, consider reporting your rent payments to the credit bureaus with Zillow Rent Reporting. A consistent history of on-time rent payments can help strengthen your credit score over time.

Pay all bills on time

Your payment history is the most important factor in your credit score, accounting for 35% of your FICO score. Make it a priority to pay every bill, including utilities, credit cards and loans, on time, every time. To make this easier, set up automatic payments or reminders.

Keep credit utilization low

Avoid loading up charges on your credit cards, as this affects your credit utilization ratio, another key factor in your credit score. Generally, it’s best to use less than 30% of your available credit limit at any given time. For example, if you have a $10,000 limit, aim to keep the balance below $3,000. The lower your credit utilization, the better chance you have of improving your score.

Avoid opening too many new accounts at once

While you might need to open an account or two to establish positive credit, applying for too many new accounts in a short period of time can result in multiple hard inquiries, which can temporarily lower your score. Bottom line: Be strategic about any new credit.

How much will my credit score increase after a foreclosure is removed?

When a foreclosure drops off your credit report, you’ll likely see a positive change in your credit score. However, the exact increase is difficult to predict. It depends on how much the foreclosure initially impacted your score and what your current credit profile looks like.

If you’ve spent the previous seven years building a strong history of on-time payments, keeping your credit utilization low and responsibly managing any new credit, the removal of the foreclosure will eliminate the last major item holding your score down. In this case, you could see a meaningful jump.

On the other hand, if your credit report still contains other negative information, such as late payments or high balances on other accounts, the foreclosure removal could be less noticeable.

Ultimately, the best strategy is to build healthy credit habits today. By doing so, you ensure that when the foreclosure is gone, your credit score is in the best possible position to reflect your financial progress.