How Do I Remove A Foreclosure From My Credit Report?
What Is A Foreclosure?
A foreclosure occurs when a borrower defaults on their mortgage and the lender then repossesses the home. This can be a devastating development for homeowners, but it is possible to bounce back.
Below, we break down everything you need to know about foreclosure, including:
- Whether a foreclosure or short sale is the right option for you
- How foreclosure affects your credit
- How to rebuild your credit following a foreclosure
How Do I Deal With A Foreclosure?
When you find that you can't make your mortgage payment, you might be faced with two options: foreclosure or a short sale.
A foreclosure usually occurs against the homeowner's will; a short sale occurs when a lender allows their borrower to sell the house for less than the owed amount on a mortgage and, while still considered damaging to your credit, is much less serious than a foreclosure.
Before considering a foreclosure, consider your options:
- If you took out the mortgage with a cosigner, then the credit scores of both borrowers will be negatively impacted.
- If you live in a recourse state, you may be held liable for the deficiency, or the amount your bank receives and what you still owe in the mortgage. If you are unable to pay the owed amount (called an upside-down mortgage), you may wind up having to file for bankruptcy. Non-recourse (or anti-deficiency) states currently include Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. Other states that allow a single lawsuit to collect debt include California, Idaho, Montana, Nevada, New York, and Utah; however, they must use either use a foreclosure or a lawsuit to collect the debt. A non-recourse loan can become a recourse loan if you refinance your mortgage or take on an additional loan. If your lender believes that you have the funds to pay them back, they will be more likely to pursue you for the cash.
- Consult with local bankers, homeowners, landlords, and realtors in your area to get a sense of the property values and the future of the housing market in your area. Pay attention to the rental prices, new construction, and how long a home remains on the market. Also consider which phase of the real estate cycle (expansion, recover, recession, etc) you are in. If the market is in recession, you will be losing money. However, if you believe that your property value will increase and you will be able to make the payments in a few years, it will be in your best interest to avoid foreclosure.
- Finally, make sure you consult with a lawyer before making any decisions.
How Does A Foreclosure Affect My Credit?
The Fair Credit Reporting Act (FCRA) outlines consumer credit rights, including what credit reporting agencies are allowed to report and how long a negative item can remain on your credit report.
A foreclosure is considered to be a major delinquency -- as serious as bankruptcy -- that remains on your credit report for up to seven years since the filing date (and not when you receive the Notice of Default), after which time it should automatically fall off your credit report.
The initial impact of a foreclosure is extremely devastating to your credit score. However, as time passes, the negative effect should lessen and your credit should improve as long as you are making sound financial choices and continue to build positive credit history.
Your lender will first report a late payment when your mortgage payment is 30 days late. This begins the process of negative marks damaging your credit. Eventually, these late payments will result in a foreclosure.
In general, banks and lenders will wait until you are 90 days behind in your mortgage payments before they begin pursuing foreclosure, which can take around two to three months to finalize. Your credit accounts will be updated to reflect the current changes.
With this many negative impacts on your credit, your score can drop anywhere from 100 to 200 points, which can move even a borrower with an excellent credit score to a bad or poor credit rating; the higher your credit score, the more negatively you will be affected.
This severe damage to your credit can make it much more difficult in the future to acquire auto loans, credit cards, personal loans, or lines of credit. It generally takes the average borrower anywhere from seven to ten years to fully recover from the damage done by a foreclosure.
A foreclosure also makes it difficult -- but not impossible -- to receive a mortgage in the future. While you may be able to obtain a mortgage, your potential future lenders will see your past foreclosure as a major red flag.
Delinquencies like foreclosure indicate to lenders that you are a risky borrower and may result in stricter guidelines for a future mortgage, such as a larger down payment.
Because of your past foreclosure, your future interest rate will be around 1.5% to 2% higher; however, if you put down a larger down payment, your interest rates may be more reasonable.
Be sure to shop around with multiple lenders for the best rate if you are looking for a new mortgage, HELOC (home equity line of credit), or if you plan to refinance your current mortgage. Many online lenders (such as LendingTree) can give you multiple loan offers within just a matter of minutes.
If you chose a short sale rather than a foreclosure, you will have to reach out to your bank or lender for debt forgiveness on the difference between the sale and owed amount. However, you will owe taxes on the deficiency.
How Do I Rebuild My Credit After A Foreclosure?
Even if your credit has been thoroughly damaged by foreclosure, you can still take steps to rebuild it.
It is possible to remove a foreclosure from your credit reports from the three bureaus (Experian, Equifax, and TransUnion). According to the FTC, you can acquire one free copy of your credit reports from the three bureaus once a year (or within 60 days of being denied for new credit) at AnnualCreditReport.com.
You can also contact a credit monitoring service to obtain credit reports that are updated either weekly or monthly.
Any errors on your credit report can either dispute them on your own or enlist the services or a reputable and knowledgeable credit repair company to do the time-consuming legwork for you. No matter what path you choose, ensure that you receive everything in writing so creditors and lenders can't go back on their word.
Remember, only inaccurate or unverifiable information can be removed, so an accurate foreclosure must remain on your credit reports until they automatically drop off after seven years.
When examining your credit reports, look in the public records section of your credit reports for incorrect data which might include information regarding your account number, balance, date opened, or anything else that is inaccurate. In the case of foreclosures, incorrect paperwork or errors on the part of the lender can help remove them from your credit report. A foreclosure that is over seven years old and still listed on your credit report can be disputed since it should have already dropped off.
The Fair Credit Reporting Act (FCRA) gives credit bureaus have 30 days to verify the accuracy of the disputed item; if they do not respond in this time period, or the entry is incorrect, it must be removed from your credit report.
Be sure to make any copies of documentation and keep the originals before submitting your evidence to the bureaus.
The FCRA allows you to sue a creditor who knowingly reports inaccurate information to the bureaus. Most lenders would rather remove a foreclosure than have to go to court.
In addition to disputing inaccurate items on You can pursue other effective and proven methods to rebuild your credit.
- Pay your bills on time. Even if you have late payments and a foreclosure, don't let your other credit accounts fall behind -- payment history is the most important factor in determining your credit score.
- Lower your credit utilization. This is another important factor in determining your FICO® score. Ideally, you want to use less than 30% of your available credit.
- Sign up for a secured credit card. This type of card requires you to make a deposit that you will use as collateral and allows you to build your credit if you make on-time payments.
- Sign up for a credit monitoring service. They offer you regular updates on your credit and additional services such as identity theft protection.
- Finally, remember that if you can't pay off the balance, the damage done by the late payments and foreclosure lessens over time and will eventually drop off your credit report after seven years.
The Bottom Line
A foreclosure can be difficult to recover from, but it isn't the end. As long as you continue improving your credit history and make informed financial choices, you can recover. Do you have more questions on credit repair? Look to one of our reputable credit repair services for further assistance.
What are some benefits of a good credit score?
A good credit score can help you with the following:
- Renting a house or apartment (without putting down a hefty deposit)
- Your mortgage payments will be lower
- You will receive a lower down payment when you purchase a cell phone
- Your utility bills will be lower
- Your insurance premiums depend on it
- Potential employers may look at your credit history to determine reliability
- It will be easier to qualify for loans
- You will receive lower rates on loans
- You will qualify for better credit cards
What factors make up my credit score?
Your FICO® is made up of five factors:
- Payment history: 35%
- Credit utilization: 30%
- Credit age: 15%
- New credit: 15%
- Types of credit: 10%
What negative items appear on my credit report?
Your credit reports can contain both positive and negative history. Items that negatively impact your credit include:
- Credit inquiries
- Late payments
- Loan defaults
- Past due payments
- Public records
- Tax liens
How can I improve my credit?
- Consider credit repair and contact a credit repair service
- Always pay your bills on time
- Deal with past due accounts
- Reduce your credit utilization
- Keep old credit accounts open
- Open new credit (but avoid applying for too much new credit)
- Monitor your credit
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