The United States will feel deep reverberations from the housing and mortgages crisis for years to come. It’s not just the glut of houses on the market, but the new bad-credit borrowers—non-borrowers, rather—that mean more bad business for years to come. Foreclosure is, perhaps, the most damaging blow to a credit score, and can mean years of pronounced financial uncertainty for foreclosed upon borrowers.
Foreclosure ruins your ability to borrow
Depending on the circumstances, a person’s credit history will carry the black mark of foreclosure for 2-7 years. In cases where the borrower experiences a sudden loss of income, like in the death of a partner, they may negotiate with their lender for reduced report on their credit—for instance, the foreclosure report will remain on their credit report for 2 years instead of 4.
On average, a foreclosure will push the all-important FICO score down 200-300 points. If you had a 720 credit score, you will be plunged into the 400-500 ranges. Though lenders may be willing to accept you as a new borrower, you will be deemed a substantial risk and subject to usurious fees and penalties.
A foreclosure isn’t always doom and gloom
If you are able to keep up with all your other sources of credit, you may be able to recover your credit standing in as little as a couple years. Credit bureaus use complicated schema to determine credit scores. Although a foreclosure is a heavy blow to your credit, if a lender sees a pattern that says, “pays on time” for everything else, this can ultimately change a lender’s mind about what kind of borrower you are.