How does a foreclosure affect your credit report?

Overview<p>If you are unable to make your mortgage payments there is a good your lender will start foreclosure proceedings. Once a foreclosure takes place it can be devastating on your credit file and it may take you awhile before you can re-establish your credit. Foreclosures can remain on your credit file for approximately seven years.

<p>Foreclosure<p>When you fall behind on your mortgage payments, as many borrowers have done because of the economy, your mortgage company or lender will begin foreclosure activities.  Your home will eventually be sold at a Sheriff's auction to the highest bidder. The minimum bid is usually enough to cover the balance, attorney fees, accrued interest and other costs and expenses.

<p>Deficiency Balance<p>After your home is sold there could be a remaining balance, called a deficiency balance, which you are responsible for, depending on the state you live in. Most lenders don't pursue you for the balance but there is a chance that they could. If they decide to pursue you for the balance they could get a deficiency judgment which allows them to seek other means to collect such as wage garnishment or even a bank levy.

<p>Credit Report<p>A foreclosure will be reported will reported to a credit reporting agency. Your information could be reported to one, two or even three credit reporting agencies, but it depends which one your lender utilizes. The three major credit reporting agencies are Transunion, Equifax, and Experian.  Once a foreclosure is reported your credit score can drop approximately 250 to 280 points. A credit score is used by lenders to determine the likelihood that you will default on a loan. Credit scores can range from 300 to 850 and the higher your score the better chance you have of receiving the best terms and agreements for loans and credit cards. Even a credit score of 850 will be lowered significantly by a foreclosure.

<p>Re-establish credit<p>It may be difficult to re-establish credit after a foreclosure. One of the ways to re-establish credit is with a secured credit card. With this type of account you will need to open a bank account with an initial deposit of $300 to $500. Your credit card will have a limit equal to the deposit in your bank account. If you default on your credit card the money will be taken from your bank account to pay your past due amount.  When you have made payments on a secured credit card for approximately one year, on time, you may be able to apply for a regular credit card which has more favorable terms and agreements. Secured credit cards come with annual fees. <p>Bad Credit - credit cards<p>Another type of credit card are, "bad credit", credit cards. These credit cards are for people with damaged credit. The interest rate will be very high and there could be a number of non-standard fees such as an application fee, monthly servicing fee, maintenance fee, processing fee and an activation fee. Your credit limit will be reduced by the amount of your fees. There will probably be an annual fee as well.  Some of the fees are recurring and some are one time fees.

<p>Universal Default Clause<p>When a foreclosure starts it could affect your other accounts with other creditors such as credit cards. Some credit card companies will periodically review your credit file to see if your financial situation changes over time. If they see that you have delinquency with other creditors such as your mortgage they may lower your credit limit, close your account or even increase your interest rate. This is called the universal default clause.

To your great success

Mel

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[WeissFaith]

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