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. A foreclosure will hurt your credit score. The question is: how much will a foreclosure hurt my credit score?
How much a foreclosure will hurt your credit score will depend on the following:
- Your current credit score – the higher it is, often the bigger the hit
- Your credit history and whether you’ve had prior foreclosures, late payments, or non-payments
- The amount of mortgage you are foreclosing on compared to your overall debt and net worth
My sincerest home is that you do not foreclose on your home. Mortgage rates are low. The Fed is being very accommodative. The Federal government is providing stimulus and the job market is coming back.
It’s best to try and hold on during the global pandemic until the times get better. If you can, refinance your mortgage so you can lower your payments.
You can find a competitive mortgage rate with Credible, my favorite online lending marketplace where qualified lenders compete for your business. You’ll get no-obligation, free quotes in minutes based on your situation. Mortgage rates are at all-time lows. Take advantage.
Foreclosure And Short Sale Have A Similar Impact
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 how much a foreclosure will hurt your credit score 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, getting a cash advance from a credit card or getting a personal loan.
Personal Loan Rates Are Reasonable
Take a look at the chart below of rates for personal loans and credit cards. It’s clear that getting a personal loan is much cheaper.
For a personal loan, take a look at Credible, my favorite online lending market place where pre-qualified lenders compete for your business. You can get real quotes for free in a matter of minutes.
If you can borrow at a reasonable rate, it may be better than going through a foreclosure or short-sale. Let me explain more below.
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. In other words, a foreclosure will not only hurt your credit score, but also hurt your ability to get credit for at least 7 years.
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).
If 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.
In 2020, banks are offering forbearance due to the coronavirus pandemic. Ask your bank if you qualify before considering foreclosure.
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 actually quite strong in 2020. Mortgage rates are at all-time lows and the demand for property is high because everybody is spending more time in their property. As a result, do your best to hold onto your home because property values are going UP in many areas of the country.
Below is a national home price appreciation chart. Notice how price appreciation is starting to accelerate in 2H2020. Giving up a likely appreciating asset is going to put you way back.
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.
4) See where you are on the real estate cycle.
Are you in the Expansion phase? Recovery phase? Dangerous Hypersupply phase? Or Recession phase? By the time you are in the Recession phase, you’re already losing tons of money. Hence, be particularly vigilant when you start noticing houses sitting on the for sale market longer than normal, rental price drops, and many new buildings under construction.
Related: What If You Buy At The Top Of The Real Estate Market?
Think Carefully Before Deciding To Foreclose
A foreclosure or short sale will crush your credit score for 7 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.
Recommendations
Shop Around For A Mortgage. To fend off foreclosure, I highly recommend refinancing your mortgage. Credible offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. When banks compete, you win. Mortgage rates are back down to ALL-TIME lows in 2020+!
Explore real estate crowdsourcing opportunities. If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Comments
Trackbacks
-
[…] people responsibly pay their mortgages through the good and bad times. If you don’t, your credit gets crushed, you won’t be able to borrow at normal rates for years, and you’ll ultimately end up […]
I am divorced and my ex was ordered to sell our house we own together. I moved out and he still lives at the house. He is refusing to sell even though it was a court order to sell and split the profits. I just found out he has not paid in over 3 months and the bank is about to start the foreclosure process. I am about to get married again in a month and wanted to know if once I get married and than my house gets foreclosed on will the foreclosure affect my new husbands credit.
This happened to me. My husband allowed the house to go into foreclosure and it has destroyed my credit. He was suppose to sell or refinance, did neither and lost it. Now I can not do anything to purchase a new house. The foreclosure wont affect your new husbands credit because his name is not on it.
I am currently divorced and I want to foreclose the house, becos I am living on the alimony and the mortgage increases every month and the expense to income ratio is not the same.
My ex name is also in the deed, and he does not want to foreclose
Already it’s been 5 months of non payment.
The mortgage debt is same as the purchase price, becos he paid only interest for 15 yrs.
As per your experience what do you suggest?The state is New Jersey.
Home ownership ruined me. Wife got sick. Was struggling to make payments. Was never late, but it was tough. Went to the bank to see what could be done. Offered me a loan modification with a very reasonable monthly payment. I accepted their terms. Had to make 3 of the payments before the modification would be finalized. Made the 3 payments, but could never connect with the final contract. Offered to have it e-mail to me, faxed to me, or fly to wherever I needed to get it, but the only option was to have it fedex to me. It never came after they said it was sent 3 times. Tracking number was bogus. They refused all my other payments after that, mailing them back to me, and 3 months later they foreclosed. That’s been 5 years now. My credit score is still averaging poor – low average, but that is meaningless compared to the depression, and thoughts of suicide and homicide I have had to live with since then. I was happy before I got the house, and was thrilled with the home when I had it, but now I am so homesick, it just was not worth it. Just can’t understand why Wells Fargo wanted it so bad.
I am sorry that this happened to you and your family. Unforeseen occurrences happen all the time. I am happy that you put your family first. This is a cruel world that we live in. I got behind on one of my payments and the bank sow that I had missed two payments. I had my receipt and faxed it to them. I was told afterwards that it was in the drawer. I made payment plans for 6 consecutive months. I paid on time but when I got to the 4th or 5th month I was told that a payment was missing and I need to increase the payment amounts along with another large down payment. I too eventually got foreclosed after 23 years. My loan was 30 years. I also went through loss mitigation which I was told that I didn’t qualify for any solution. Purchasing a home can be very stressful. I think that the bank should have worked with you. I thank the most high that you are living and ok. Foreclosure isn’t as bad as it seems. You could try to buy again after two years.
So sorry to hear what happened to you. I had a home that was mortgaged through Wells Fargo. I do all my banking online and have always paid all my bills on or before they are due and have an excellent credit rating. For some reason, my EFT payment did not go through and once I realized this I resubmitted it. I believe only 5 or 6 days went by before I noticed what happened. To my complete surprise, Wells Fargo fired off a nasty letter to me in regard to the late payment, which was well within the typical 15 day grace period. The letter threatened to foreclose on the ouse. I called them to get an explanation of why it was even necessary to send the letter. The representative was unprofessional and stated that if my payment was ever late again, even by one day, they will institute foreclosure proceedings. I told them they can’t do that and it has to be at least 90 days delinquent and they told me they could foreclose anytime they wanted. I refinanced as fast as i could to get away from these assholes.
Five years ago in Texas I signed an FHA note on house for my sister with the understanding the house would be transferred to their name when they qualified. No written agreement. I never lived in home and never invested any money in home. Sister has moved on and advised she will make no further mortgage payments. I cannot make mortgage payments. I’ve spoken with lender. They advised they have to go through foreclosure process. I told them I would sign papers now to transfer property to them. Now I’m retired, have no assets, and live on social security. I have spoken to realtors, attorney, and others. Housing Market in this area is very bad. Many homes are for sale. I’m heartbroken but also very worried about future financial status. Are there other options available to me? Thank you.
I did a short sale. After the short sale my score is 711, 715 and 785. My credit card limit is still at 75k. Dropped that hot potato and paid cash for my current home here in florida. Beautiful safe haven.
Hi – When you did your short sale, had you missed any mortgage payments? I’m in the short sale process and haven’t missed any payments yet – I’m wondering if I need to try to continue paying even though the high payments are killing me. Your ability to keep high credit scores after a short sale make me hopeful. I’ve had my house on the market but haven’t been able to sell at market rate.
I was working with my Mortgage Company to do a Deed in Lieu because they said I was eligible for it. After I sent my paper work in, they stated they needed more paperwork in which there was a deadline. Good I called to see how the Deed in Lieu was going, that’s when they told me about the foreclosure.
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?
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.
What state are you in? It depends if you have other assets and you are in a non-recourse state.
Will a foreclosure affect my credit if I sell the house before the sale date?
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!
James,
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!
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.
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!
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.
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.
Hi Shilpan, 2012 is so last year. What about now? It’s important everybody speaks to a lawyer or real estate advisor because each person’s situation is different.
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.
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.
@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?
1. business decision based on a reduction in my income from the recession 2. First mortgage forgave $101,000. Second mortgage forgave $43,000.
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?
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!!
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?
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.
Daniel, you are correct on a non-recourse loan turning into a recourse loan if you refinance or take out a HELOC. I’ll add this important point in. Thx
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.
FYI – Washington state is not strictly a non-recourse state. Lenders can choose a judicial or non-judicial foreclosure.
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.
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.