How Much Will A Foreclosure Hurt My Credit Score?

Foreclosure Overlooking Hong Kong HarborThe housing market correction was brutal. If you are one of the millions of people considering foreclosure or a short sale, you need to read this post first and understand all the consequences before proceeding. If you are already in foreclosure or going through a short sale, then you should check your latest credit score and figure out how to climb out of purgatory.

A foreclosure and a short sale have similar negative hits on your credit score. A foreclosure is generally worse because you are not working with your bank whom you owe money to settle your debts. A short sale, on the other hand is debt forgiveness. Your bank agrees to forgive the difference between the sale and what you owe. Just be aware you will probably have to pay taxes on your deficiency. There is no free lunch.

Once your credit score gets trashed, it takes anywhere from three to seven years to fully recover. Sometime your score may never fully recover at all. With all the questions I’ve received on the subject, and my own temptation of letting one of my vacation properties go during the economic crisis, this post should help you weigh the pros and cons of foreclosure or a short-sale. The information is gathered from our friends at FICO, two real estate lawyers I spoke to, my own experience, and thoughts from several mortgage officers.

How Much Will Your Credit Score Get Hit In A Foreclosure?

According to FICO, if your credit score is 680, a foreclosure will drop your credit score on average by 85 to 105 points. If your credit score is excellent at 780, a foreclosure will drop your score by 140 to 160 points. In other words, the higher your credit score the more it will get smashed! High credit score holders must think much more carefully before foreclosing or conducting a short-sale. My TransUnion credit score dropped from 790 down to 685 during my tenant’s $8 non utility bill payment debacle a couple years ago, so I completely believe FICO’s figures.

Here’s a brief summary of averages from Fair Isaac:

  • 30 days late: 40 to 110 points
  • 90 days late: 70 to 135 points
  • Foreclosure, short sale or deed-in-lieu: 85 to 160
  • Bankruptcy: 130 to 240

It’s really hard to get much lower than 500 (out of 850) on your credit score even if you tried. If you do have a poor credit score, find solace knowing that banks will equally deny someone a loan or refinance for scores up to ~650. The main reason is there are enough 650+ credit score holders lining up to borrow money that it’s not worth taking the credit risk on lower credit score individuals. If you have a poor credit score, the alternatives are borrowing from your 401k, from friends, or through Prosper Loans. Prosper allows you to consolidate your debt with interest rates as low as around 7% compared to 15%+ for credit cards.

How Long Will A Foreclosure Stay On Your Credit Report?

A foreclosure will be on your record for 7 years on average, plus 180 days from the last time the account was paid as agreed. The public record would have its own opening date (the date the foreclosure was filed at the courthouse) and would show for 7 years from the date of the disposition. Your credit score will gradually improve over these seven years, but not fully until the foreclosure is off your record.

Those who’ve been through foreclosure and want to do conventional financing in the future will have to pay a higher interest rate (approximately 1 and a half to 2%) unless they put a sizable downpayment on their new property (more than 20% down). Given you’ve just gone through this terrible experience of foreclosure, I suggest not bothering with taking on debt until the foreclosure has been removed from your credit report. Give yourself a chance to breath without debt.

When Will My Mortgage Company Start Reporting Late Payments?

Your mortgage holder will begin negative reporting to the credit bureaus the first time you are 30 days late with your mortgage payment. Therefore, before your foreclosure even begins, you will have negative marks on your credit, bringing your score down. Most banks wait until you are 90 days behind in your payments to begin foreclosure proceedings, which often take two or three months to complete. By the time your foreclosure is actually finalized, you will find that your credit score is reflecting six months of missed payments; this can take your score down by up to 200 points.

Depending on whether you live in a recourse or non-recourse state, you could be held liable for the difference between what the bank gets for the property in foreclosure and what you owe in mortgage. This is called the “deficiency.”If you are in a recourse state, the bank has the right to go after your other assets to make up the difference. If you cannot pay the difference between what you owe and the sales price (upside down mortgage), you might have to file for bankruptcy which is extraordinary painful on your finances, mental health, and ultimately happiness.

Considerations Before Foreclosing

1) Check whether you live in a non-recourse state. Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington are considered non-recourse / anti-deficiency states, but double check anyway. There are states such as California, Idaho, Montana, Nevada, New York, and Utah who are permitted a single lawsuit to collect mortgage debt. They need to choose between foreclosing or suing to collect debt. Furthermore, if you refinance your loan or take out a second loan, your non-recourse loan can turn into a recourse loan. The richer they think you are, the higher than chance a bank will go after you. Always check with a lawyer.

2) Assess your financial situation. Can you pay the mortgage or do you just not want to pay the mortgage? If you just don’t want to pay the mortgage, then you’ve got to think what a badly damaged credit score means to your future. A bad credit score could hurt your employment opportunities as more and more employers check your credit score. Employers are much more demanding of candidates in this competitive labor market. A bad credit score will cause for much higher rates for a car loan you shouldn’t get, a credit card you should sign up for, and a new property you shouldn’t buy. Seriously ask yourself whether you can do without credit and have a black mark on your account for seven years before going into foreclosure.

3) Assess the future of the property market in your area. The property market is finally on the upswing in 2013, however, each location is different. Talk to your local realtors, homeowners, landlords, economics, and bankers to get their opinion. Got to several open houses and see for yourself what’s going on. If you think your house can recover back to your original purchase price within 5 years and you can afford the payments, do not foreclose or short-sale. Remember, your foreclosure will be on your credit report for 7 years. Make sure your living situation is congruent with your real estate outlook.


A foreclosure or short sale will crush your credit score for seven years and potentially ruin your future as well. If you have already foreclosed then stop the bleeding by making sure all other bills are paid on time. Perform great work at your existing firm. Build alternative income streams so you have the optionality in case something else bad happens.

Carefully weigh the pros and cons of doing a foreclosure before proceeding. If you have two people on the deed, know that both owner’s credit scores will be negatively affected. If you are already 30 days late or more on your payments, check your credit score and call the bank to see if you can work something out. Right now is the perfect time to negotiate with your bank with all these multi-billion dollar settlements with the US Department of Justice for “robosigning” and wrongful foreclosures. If you wait until you are 90 days late, there is no turning back.


* Check your free credit score now! I highly recommend signing up for Credit Sesame, a company that provides free unlimited daily credit scores, free monthly credit reports, free 1-Bureau credit monitoring and alerts, free analysis of all your credit and loans, and free $50K identity theft insurance and ID restoration help! Unlike other “free” credit score companies who hope you forget not to cancel before their free 30-day trial is up, there’s no need to give Credit Sesame your credit card information.

A credit score is important when trying to get the best loan terms possible for a mortgage, car loan, or personal loan. Because of a delinquent $8 electric bill payment my tenant didn’t pay, I unknowingly had a credit score in the 600s that almost torpedoed my mortgage refinance! Finally, it’s simply a great idea to have constant monitoring to get a complete financial picture. You just never know with so many credit report errors and identity thieves out there. Sign up for your free credit score with Credit Sesame today. 

* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Interest rates are back down to ALL-TIME lows in 2015 due to tremendous volatility and uncertainty in the markets. The Fed has signaled interest rates will start going up in 2016 due to inflationary pressure. When banks compete, you win.

* Consolidate Your Debt With P2P Lending: If you currently have multiple loans with a high interest rate, consider consolidating your loans through Prosper. Prosper is a P2P lender, which advertises a borrow rate as low as 6.75%. I’ve met them multiple times before in San Francisco, and they are absolutely a terrific solution to lower your debt payments. I’ve been lending via Prosper for over two years and earn a 7.4% return that is absolutely passive.

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Updated in 2H2015

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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  1. Jason Clayton | frugalhabits says

    Very interesting, I never realized that the higher your credit score the worse you get hammered. I’ll remember that if I ever find myself in this situation.

  2. Eric says

    FYI – Washington state is not strictly a non-recourse state. Lenders can choose a judicial or non-judicial foreclosure.

    • says

      Eric, thank you for your input. This is why I love opening things up to the community as more heads are better than one.

      Speaking to a lawyer, most foreclosures in Washington State by far are the non-judicial foreclosure type. Once the property is sold at a trustee sale, a bank is barred from collecting any deficiency on the collateral.

      However, sometimes, a judicial foreclosure is executed through the courts and is easily identified because it is an actual lawsuit against the homeowner. Why doesn’t the bank just go after the Deed of Trust and sell the property? A judicial foreclosure goes one step further than regular non-judicial foreclosure: it not only allows the bank to compel a sale of the property, but it provides an avenue by which the bank can go after the deficiency e.g. you owe $500,000, bank sells for $300,000, the bank still wants it’s $200,000 back if they think you can pay.

      Judgments are not desired because they become automatic liens on all real and personal property. With a judgment a bank can garnish wages and pursue other avenues against the borrower’s assets.

      Bottom line, if the bank thinks or knows a person foreclosing has the ability to pay, the chances of them going after the person increases. Everyone considering foreclosing please talk to a lawyer, a friend who has foreclosed, or other experts please. Nothing is black and white. Put yourself in the bank’s shoes. If Bill Gates forecloses on his mega property in Medina, it’s probably worth going after him.

  3. says

    I’m so glad my wife and me didn’t have to deal with this. We bought our house a long time ago and so when all this crap happened in ’08, we weren’t affected too much. AT least for our house anyway. I relaly didn’t know what a foreclosure woudl do to a credit score; this post makes me extra glad that I’m not dealing with that. I do handle the cleanup or maintenance of many foreclosed homes, and it sucks that now I know how much it sucks even more for these peopel. Loss of house and a big drop in credit score. Sucks.

  4. Daniel Cohen @ says

    Living in a non-recourse state does not mean that your loan is a non-recourse loan. Non-recourse protection may only be available to purchase money loans. In California, for instance, which is a non-recourse state, if you refinanced your purchase money (non-recourse) loan, the new loan is a recourse loan.

    Separately, the FICO score impact mentioned is an average drop. How each individual’s score will be affected depends on the number and type of accounts that remain in good standing. Consider a credit report like a trial to determine a person’s credit rating. A foreclosure is a strong witness that the person is not credit-worthy. However, if that person has student loans, credit cards, and a car payment that remained in good standing, there are plenty of witnesses that the person is a good credit risk. In such a case, a person will both experience a drop in score at the low end of the range and bounce back to strong credit more rapidly. If a person has a foreclosure and either has no other credit accounts or the other ones also report derogatory information, the effect will be more severe and the time it will take to rebuild to strong credit longer.

  5. JC says

    I went through a short sale on an investment property. My credit score went down from 800 to low 600’s. What was the most annoying was that my credit card limits went from $25,000 to $500!!! That’s insane! I had to carry around cash all the time because a $500 limit is nothing. Also, other creditors will catch wind of this and possibly adjust your interest rate.

    • JayCeezy says

      @JC, sorry to hear about the annoying inconvenience. 2 questions: 1) what was the reason you sold the investment property?; 2) how much was the debt forgiveness?

      • JC says

        1. business decision based on a reduction in my income from the recession 2. First mortgage forgave $101,000. Second mortgage forgave $43,000.

    • says

      Yikes, thanks for sharing. I didn’t think about the credit card limits going down by 95%. Did the credit card company just cut the credit one day without telling you? What if you had a $5,000 balance. Do they just say “so sorry” but pay it off, and only until you pay it off can you then spend $500 a month?

      • JC says

        Both credit card companies sent letters. I pay off my balance every month, but I’m sure they would have said exactly that. Ttwice a year I call back to try and get my balance up. As of 3 months ago they would only give me $2500 limit. Its been 30 months since my short sale, my FICO is back above 700 and I make good money and have assets. Yet, they only see all the late mortgage payments (I had to have to qualify for short sale) and of course the short sale itself. Meanwhile, I just refinanced my primary residence and cant even get a hike in my credit limits!!

        • says

          Hmm, so even if u paid your CC on time, they wanted to downgrade their exposure to you by lowering your credit. I guess it is a rational move.

          Good stuff getting back to 700 and refinancing! What rate and duration did you get?

  6. says

    This kind of information should be a part of disclosure when you buy property. I think far too many people do not consider the downside of a choice they make. I think we get caught up in the excitement of buying and do not think about what can happen.

  7. says

    If you short sold your home in 2012, you won’t be liable to pay taxes on the deficiency. Congress passed this law in 2007 when real estate market started sliding sharply. A single home owner gets $1 million and a couple gets up to $2 million in the deficiency tax waiver.

    Also, short sale shows a less derogatory than its nemesis — foreclosure. It takes 2-3 to recoup your score back to where it was prior to short sale compare to 7 years for the foreclosure.

  8. JC says

    Also, I was not able to easily refinance my primary residence because many banks want to see 3 years pass after my short sale closed. Fannie says 2 years must pass, but many banks have their own rules.

  9. says

    Credit scores really can take a big hit. I’ve been fortunate not to have had to forclose or miss payments so my credit score has been fairly stable. I was also surprised to learn about the non-recourse rules in states like California when you first wrote about that. I didn’t realize though that some states have the ability to file suit. Yikes.

  10. Mike says

    I learned this the hard way-but unlike some of the people I know personally-I learned my lesson from doing something like this to myself. But it is always a good reminder to have someone else say that you need to be careful how you handle things with your money. After all, it is easy to get into a world of hurt quite fast!

  11. Jodi says

    My house was foreclosed by GMAC in 2007. I tried everything to save it, but I was deaf to them. They came in, took my stuff and changed the locks. About a year later, I was able to get their attorney to give me a document marked… in rem judgment Satisfied and the action Discontinued and Ended. Two of the credit reporting agencies will not remove the foreclosure from my credit report. Do I have any re course? Thank You.

  12. James says

    Hi there.

    I suffered an investment loss (a huge one!) from an investment property. It was in Nevada and lost over 70% of the value since we bought it. Heartbreaking and nearly killed me in stress, but I pulled through. I just assumed my credit (was 780 – 800 range) must have gone in the toilet, but I was thinking of buying a property recently (foreclosure was about 2-3 years ago). My credit score is 790! And the lender hasn’t mentioned anything about any foreclosure.

    So what’s the deal? Did they maybe say “forget it” and not attach it? I recall checking last year on my credit score and it was around 790 as well! Very excited to hear that, but I am curious why it never dropped my credit score.

    As an FYI, it was a bad loss. But the bank was very amicable and said, “listen, we have to go through the foreclosure process and I can tell you we won’t be sending you a judgment.” And they were true to their word and didn’t. But did they not report it on my credit? Why is my credit so high?

    Given that it sounds like they didn’t report it, would I be able to get a loan? My credit score is great and my new job shows well-qualified W-2 income.

    Please advise! There is a house I am looking at and want to jump on it if they accept my offer, but I don’t want to lose my deposit if I remove contingencies, etc.

    Thanks for your time and expertise!

    • says


      Sounds like you’ve bit the lottery! Foreclosures in Vegas were so common maybe they really did just decide not to report you.

      Seize the opportunity, but make sure it’s a good investment. Good luck!

  13. DREMA ELMORE says

    3 Months behind on mobile home mortgage. Company requesting 3 payments then vacate 1 month afterwards. Should I make payments then move so they can foreclose, not pay and let them evict/foreclose or let family member take over balance of loan $28,000 in my name and write up contract with him since he has no credit and wants to help my credit stay clear? I am 60 yrs old and recently unable to work due to health problems and don’t plan on going in debt again.

  14. S. McDowell says

    The only thing on my credit report is my recent foreclosure of my house. I tried for almost 4 years to refi and no bank would touch me. My mortgage was almost 2x what it should have been because I’ve been a bartender for 18 years; they said my debt to income ratio was too high,(even tho I’d done it on my own for almost 10 yrs) hence why no one would help me no matter what rates and programs were available. I qualified, but with the lack of showing money, it would never be approved. With that being said, that was my ONLY debt-the mortgage. No credit cards, car paid off, nothing in default. Is this an ok thing when I want to move soon and rentl agencies do credit checks?


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