What Happens to My Credit If I Foreclose?

Many Americans face foreclosure on their homes every year. Over 13 percent of home loans were at least one payment past due or already in the foreclosure process in the third quarter of 2010, according to a Mortgage Banks Association survey of 44 million loans. Foreclosure means that you lose your home, and it also devastates your credit bureau files.

Credit Rating

Your credit rating takes a severe blow when your home goes through foreclosure. The incident is placed on your credit reports by the Experian, Equifax and TransUnion credit bureaus, where it is visible to anyone who views the information for credit, insurance or employment purposes. CNN Money website writer Les Christie advises that foreclosure drops your credit score by 85 to 160 points. Those with a previously high score experience the biggest drop. The score impact can put you into sub-prime territory, keeping you from getting new loans and other credit.

Time Frame

A foreclosure gets reported on your credit reports for seven years, according to the Federal Trade Commission (FTC) website. Lenders and others see it on your credit reports for that entire time frame, but its impact drops as the years pass. Jessica Bennet, a community mentor on the MortgageFit website, explains that its worst effect is during the first two years. You can restore your credit to a post-foreclosure level within two to four years by making on-time bill payments, keeping owed balances low and avoiding new defaults.

Alternatives

You have two alternatives to foreclosure if your bank agrees, although both alternatives have the same effect on your credit. Christie explains that you can do a short sale, in which you sell your home for less than the owed amount, if the bank agrees to waive the additional balance. The other option is a deed-in-lieu, in which you voluntarily give your bank the home in return for not being held responsible for any outstanding amount.

Warning

Scammers prey on those who are desperate to avoid foreclosure with a variety of schemes, the FTC website warns. Ads on television, online, in newspapers and even on street medians promise to stop the foreclosure process. In reality, the company might offer worthless advice, a bad rent-to-own deal, bankruptcy or even theft of your home title. Fraudsters usually want money up front, according to the FTC. They keep it without performing any services or give useless, or even harmful, "help." Report foreclosure fraud to the FTC, the Better Business Bureau and the Attorney General in your state.