If you can't make your mortgage payments, your lender may initiate foreclosure proceedings to claim the property and sell it. Not only does that mean you'll have to leave your home but it will have a devastating effect on your credit and make it harder for you to buy another house.
How much a foreclosure impacts your score depends on what your credit was like before. According to FICO, the data analytics company whose scoring models are used in 90% of lending decisions, higher credit scores are penalized more than lower ones.
And the higher your score, the longer it takes for it to fully bounce back from a foreclosure on your credit report. Higher credit scores take more time to achieve in general and a significant drop can set you back more than an equivalent dip in a lower credit score.
Below, CNBC Select explains how foreclosure can impact your credit and what you can do to rebuild it.
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What is foreclosure?
Foreclosure is when a lender decides to take ownership of a borrower's home because the borrower has failed to make payments on the mortgage. This is commonly referred to as "defaulting on your mortgage," and when this occurs the lender must take back the property to recover the money owed.
In this scenario, because the borrower didn't follow through on repaying their loan, the lender can seize the borrower's property as collateral for not adhering to the repayment obligation.
How long does foreclosure stay on your credit report?
Similar to bankruptcy, it takes seven years for a foreclosure to disappear from your credit report.
As long as it remains on your report, it will be difficult to obtain a conventional mortgage, according to the Consumer Finance Protection Bureau. You may qualify for an Federal Housing Administration (FHA) loan. or a subprime mortgage, which could have a much higher interest rate that increases over time.
How to rebuild your credit after foreclosure
Even though a foreclosure stays on your credit report for seven years, don't want to wait that long to start rebuilding. Here are several ways to repair your credit score.
Pay your bills on time
Payment history is the most important factor for achieving a good credit score. Whether you've paid your past credit accounts on time makes up 35% of your FICO score calculation. We always recommend paying off your balance in full so you don't carry it over to the next month and accrue interest, but when money is tight you should always make at least the minimum payment.
Keep your credit utilization rate low
Your credit utilization rate, or how much of your available credit you use, should be no higher than 30% according to experts, or even10% utilizationto see the best score. Lenders and issuers want to see that you don't use all of your credit limit, so the higher the limit you have and the less of a balance you carry, the better. This factor makes up 30% of your FICO score calculation.
Apply for a secured credit card
It may sound counterproductive, but one of the best ways to rebuild your credit is to apply for new credit and use it following the above two guidelines. Secured credit cards are easier to qualify for and they require a deposit (usually $200 TO $300) that acts as your credit limit.
The Capital One Platinum Secured Credit Card is one of our favorite secured cards because of the option for a lower deposit. The varying minimum security deposits for the Capital One Platinum Secured Credit Card are starting as low as $49, $99 or $200 based on your creditworthiness — all of which come with a $200 credit limit. If you make on-time payments for five months, Capital One will review your account for a possible credit limit increase
Capital One Platinum Secured Credit Card
Learn More
Rewards
None
Welcome bonus
No current offer
Annual fee
$0
Intro APR
N/A for purchases and balance transfers
Regular APR
29.99% variable
Balance transfer fee
$0at the Transfer APR, 4% of the amount of each transferred balance that posts to your account at a promotional APR that Capital One may offer to you
Foreign transaction fee
None
Credit needed
No credit history
Terms apply.
Read our Capital One Platinum Secured Credit Card review.
Unlike most secured cards, theDiscover it® Secured Credit Card earns rewards. Cardholders automatically earn 2% cash back at gas stations and restaurants, up to $1,000 each quarter, and 1% cash back unlimited on all other purchases. As a welcome bonus, Discover will match all the cash you’ve earned after the first 12 months.
Discover will also review your account after seven months to see if you can transition to an unsecured line of credit and return your $200 deposit.
Discover it® Secured Credit Card
Rewards
Earn 2% cash back at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter, automatically. Plus earn unlimited 1% cash back on all other purchases.
Welcome bonus
Discover will match all the cash back you've earned at the end of your first year
Annual fee
$0
Intro APR
N/A on purchases
Regular APR
28.24% Variable
Balance transfer fee
3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Foreign transaction fee
None
Credit needed
New / Rebuilding
*See rates and fees,terms apply.
Read our Discover it® Secured Credit Card review.
Bottom line
If you had to live through a foreclosure, know that your credit won't be tarnished forever. Keeping current on your other accounts will help balance the negative entry and a secured credit card can also help you bounce back.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
