How Does Foreclosure Impact Your Credit Score?

Hey, guys, Mike from Mike buys houses here. This video today is about the impacts of foreclosure and how does a foreclosure affect your credit. Specifically, how it’s going to impact your credit. Recently, I spoke to a homeowner who reached out to us via our website and we had a quick conversation.

He had just gotten his notice of default from the county, and at that point, he was beginning the foreclosure process. So what he really wanted to know was ‘How does the foreclosure process impact your credit score, and what are the actual impacts of a foreclosure?’ Those are great questions to ask, as are thoughts like ‘Is it worth doing anything about? Should he let the house just foreclose?’ Those are tough questions but ones you need to ask yourself when in that position.

What are his options?

What should he do?

You know, why does it really matter if he does anything at all?

As we continued our conversation, we ended up going over some of the numbers as far as how your credit is impacted based on missed payments, and don’t worry, we’ll show those here as well.

So if you’re going through any process similar to this and you’d like to get a little more information, either watch the video above or give us a call at 267-984-476 and we’ll be able to go over your specific situation with you.

What is a foreclosure?

So the first thing we talked about really is what a foreclosure is. So after a few missed payments, especially in New Jersey it’s going to be usually 3 to 4 months worth of missed payments, then the bank is going to send what’s called the notice of default. Really that means that they’re starting the foreclosure proceedings.

Which means that over time, through legal hearings in the court, the bank plans to repossess the property from the homeowner due to missed payments and failure to pay.

So basically foreclosure is when the bank tries to take the property back for failure to pay.

When do credit changes begin after a Notice of Default?

So now that the foreclosure process was started for this homeowner, he wanted to know how much was that going to change his credit?

He was thinking that now that the process had actually started, that’s when the credit impacts were going to begin. Unfortunately, I had to let him know that the credit changes begin after the first missed payment. The credit reporting system is pretty good and they make sure that as soon as the payment is missed, they notify who needs to be notified so that the credit score changes can begin.

So now that a notice of default had been sent, and in this situation, he missed four months’ worth of payments. What that actually means is that four times his credit has been dropped. So for each individual payment missed, then the notice of default again is going to only impact his credit further. In essence, the moment the credit score is affected is when the first payment is missed. This is just the start of the process when considering how does a foreclosure affect your credit

If foreclosure goes all the way through until the end, that is going to last for SEVEN YEARS on your credit!

So, timeline for credit changes associated with foreclosure starts at the first missed payment and goes till seven years after the foreclosure is done. So, it’s a pretty long and arduous process.

Why do these credit changes matter?

So after we had clearly established that there would be a negative impact to his credit and that it would last for the next seven years, he went on to ask me why that really mattered. He didn’t really care about his credit score, it has never been important to him before. What does having a foreclosure or bad credit score really impact?

To discuss this idea, we went into the two main things that most people use credit for when they’re trying to make a purchase. That’s for a brand new car or even a used car if you’re getting a loan on it or buying a new house.

I told him that over the next seven years, those two things are going to be VERY difficult to get done with foreclosure on your credit. If there is a foreclosure on your credit, the banks are going to want a co-signer with you. The banks will charge you more down and they will charge you higher interest rates and higher fees.

So, with all those things in mind, he wanted to learn a little bit more about how he could avoid foreclosure then, so I sent him the 8 Steps You Can Take to Avoid Foreclosure.

The last thing that we talked about is what the actual credit changes would be based on your missed payments and based on going through foreclosure. So, one of the first things we talked about is that, based on what your credit score is now, that will determine how much your credit will be impacted based on missed payments.

Typically, if your credit score is around a 680 and you go through foreclosure, that will drop your rating anywhere from 85 to 105 points. Meanwhile, if your credit score is better than that, say around 750, foreclosures going to drop you anywhere from 140 to 160 points. So, the drop in credit rating is dependent on what you already have as a credit score.

The higher the credit score, the bigger the drop is going to be based on your missed payments. So they penalize you more if you already have a good credit score and then start to miss payments. As we discussed previously about those payments, as they are missed, the credit score drops and it’s going to become more and more difficult to make big purchases in the future, especially for the next seven years.

This brought about the final question from our homeowner, which was ‘What if he had stopped the process earlier? What would the changes be?’.

So, as you can see in this table here, if you’re 30 days behind on your mortgage payment, then the drop in credit score is going to be anywhere from 40 to 100 points. If you’re 90 days behind, it’s going to be anywhere from 70-135 points. The foreclosure or short sale is going to drop a credit score anywhere from 85 to 160 points while going through a bankruptcy is going to drop your credit score anywhere from 132-240 points.

So, it’s pretty significant ranges depending on where your credit is starting. But as you can see, there’s immediate changes to credit with just 30 days worth of missed payments. So just one missed payment is going to start dropping your credit. As we mentioned, that is going to make it more difficult to get a car or house or anything that’s purchased via credit for the next seven years.

So, it you would like to avoid this whole process and you’re looking to sell quickly or simply learn more about what’s the best option for you, then you can reach out to me at 267-984-4765. On that call, I can teach you a little bit more about how we can buy your house quickly and how we can even work together to help improve your credit.

So again, you can reach me at 267-984-4765 or fill out the form below.