The Impact of a Foreclosure on Your Credit Score

Something I’ve been thinking a lot about lately is the impact of a foreclosure on one’s credit score, given the whole housing crisis taking place.

Clearly it’s one of the worst black marks you can get on your credit report, aside from say bankruptcy, but the impact may not be as detrimental going forward as it once was in the past.

Think about it; foreclosures have skyrocketed to new record highs over the past year and change, so with a larger percentage of borrowers stuck with such a derogatory mark, the impact must surely fall.

And I believe that’s something Fair Isaac, now simply known as Fico, will need to take into account as they continue to fine tune their credit scoring formula, at least if they plan to stay relevant.

Using old metrics, where only a small sliver of the population would experience foreclosure, is simply not suitable anymore, and may improperly shut out deserving borrowers.

That’s not to say foreclosure is a permissible offense, but it’s certainly more forgivable than it has been in the past.

Unfortunately, even if Fico does weigh a foreclosure filing less severely, it will likely remain on your credit report for seven years regardless of any scoring changes.

This means, although your credit score may not be as negatively impacted numerically speaking, the presence alone could be enough to be denied credit or a new mortgage in following years.

Of course, individual banks and lenders also have certain rules regarding previous foreclosure, so they may adjust their underwriting guidelines as well to accommodate prospective borrowers.

Remember, there’s no specific numerical amount a foreclosure will lower your credit score, as each credit profile is highly unique and takes into account all of your other credit history and activity.

If you have recently gone through foreclosure, here are some tips on how to raise your credit score.