What Affects Does Foreclosure Have On My Credit

Hearing your bank use the term foreclosure is terrifying, yet many families still face the desperate situation. The term foreclosure is well-known but also very misunderstood. People are not sure how it will affect their credit score and what it can do for them in the future when it comes to their finances.  When you don’t have enough to cover the bills or even the HOA fees, its hard.  A lot of people say foreclosure isn’t a huge deal and say they can’t get blood out of a stone. However, there are other options people should consider. We’re going to cover how foreclosure impacts your credit rating and if banks can come after you for the remaining amount owed.

An apparent misconception people have when they hear the term foreclosure is that the bank is taking somebody’s house back. Although people use this language often, it’s not at all accurate. This terminology is important because legally speaking the names on the deed is important when it comes to your credit score. This distinction should be stated clearly if you’re going to look at this subject and take it seriously.

The bank is in the industry of lending money. They are not in the business of home possession and quite frankly don’t want to be. When the bank forecloses on your home, it’s a serious issue because they are going through the process of transferring your name off the deed to a trustees name. This title would now be the lender. The bank would then want to reclaim their money by taking the home to foreclosure auction.  The person’s credit score is then impacted by the transferring of the title.

Both a short sale and a foreclosure will impact your credit score in negative ways. However, a  foreclosure is a more difficult way to go and will affect your rating significantly more. The reason for this is because you are not working with the bank during a foreclosure process. Some people even abandon their home in a foreclosure situation while others refuse to leave. The bank would rather not deal with foreclosure unless It’s a profitable option for them.

Interesting enough, Homeowners having a higher credit score will be impacted at a higher level if they go to foreclosure, whereas someone with a low credit score initially will have less of an impact. For example, somebody with a credit score hovering just below 650 may only lose around a hundred points off of their score. Now,  someone with a score around 800 could receive a penalty of 170 points or more according to FICO mortgage scoring systems. The logic behind this is a lender is less likely to approve someone in the future within the 600 range anyway.

Once the house goes to foreclosure and then to auction the bank will try to reclaim as much as they can to cover the initial mortgage agreement. Knowing the worth of your house is interesting information. If the lender is unable to recover the outstanding amount remaining on the mortgage in addition to the costs of foreclosure, they can file suit against you. This legal action can prove significant because not only is your credit score getting hammered but they will take you to court too and possibly garnish future wages to cover their loss.

Foreclosure can stay on your record for seven years. This process can truly disrupt your ability to move forward with the situation. It would be a better plan to explore all your options that are available including short sales, bankruptcy and possibly even a lengthy loan modification. Anything you attempt to purchase down the road will require a higher down payment usually somewhere above 20%, and you will be required to pay higher interest rates on any money you borrow.

Foreclosure is the end of the line, and it’s the worst option to pursue. The transferring of the home to the trustee of the lender can significantly impact your credit score. Depending on where your credit rating sits prior to foreclosure you can be affected differently. A Person with a higher credit score will experience a more significant penalty. If the bank or lender does not recoup their loss after going to foreclosure auction they can pursue it further through legal action.


Garry Hoge is a well-respected Investor and business owner. With decades of experience as a real estate entrepreneur in Texas. He has closed countless deals involving investment acquisitions, property management and has a giant footprint in the industrial warehouse market.