Will Foreclosure Ruin My Credit History?

By George Stargell, Senior Editor   

There's no way to sugarcoat this: Short of bankruptcy, foreclosures are about the worst thing you can do to your credit history.

Just like bankruptcy, a bank foreclosure stays on your credit report for at least seven years, and it'll send your credit score plummeting into the least desirable interest-rate brackets. Unlike bankruptcy, though, a foreclosure won't erase your other debts. This can be good or bad news, depending on your situation:

  • The good: You can start to re-establish (or maintain) a pattern of on-time payments on your other outstanding debt. That might help you build up your credit history — and score — a little faster than you would if you had to re-apply for credit cards and other credit lines.
  • The bad: Potential lenders will worry about your ability to pay back other lines of credit after a mortgage default. Plus, people who file for bankruptcy might be less risky in creditors' eyes than people who file for foreclosure, because bankruptcy filers are no longer tied down by old debt.

What's the bottom line on home foreclosures and my credit history?

  • Repeated hits to your credit report and score. These include your first late payment of 30 days or more, a "Notice of Default" when the bank foreclosure process begins, the "Notice of Trust Sale," and finally the "Trust Deed" sale, the seven-year blackmark. Every hit knocks your credit score down.
  • Less available credit. Fewer lenders will take a chance on people with damaged credit histories, especially in a tight credit market.
  • Higher interest rates. If you can open a new line of credit, you'll be paying more for the privilege. Plus, universal default rules allow your existing creditors to raise your interest rates even if you stay current on those payments.

What choices do I have?

Your best bet, obviously, is to avoid home purchases that might result in bank foreclosure proceedings. If foreclosure becomes a possibility, try to refinance your mortgage. Lending institutions prefer receiving steady monthly income to owning homes themselves, particularly in a weak real estate market, so they have an incentive to refinance.

Failing that, consult a financial professional.