How Mortgage Delinquencies and Foreclosures Affect Your Credit

Falling behind on your mortgage payments can happen to anyone – you lose your job, have unexpected medical bills, or just hit a rough patch financially. But while missing a payment here or there might not seem like a huge deal, mortgage delinquencies and foreclosures can seriously damage your credit for many years. Here’s what you need to know about how these events impact your credit score and financial life.

What is Mortgage Delinquency?

Your mortgage is considered “delinquent” as soon as you are 30 days or more past due on a payment. So if your mortgage payment was due January 1st and you still haven’t made the payment by January 31st, your loan is officially delinquent. The longer you go without making payments, the worse it gets:

• 30 days late – Loan is delinquent
• 60 days late – Loan is two months delinquent
• 90 days late – Loan is three months delinquent
• 120 days late – Loan is four months delinquent

Lenders are required to report your delinquency status to the credit bureaus once you are 30 days late. This means a single missed payment can show up on your credit report and start negatively impacting your credit score. Multiple missed payments do even more damage.

How Mortgage Delinquencies Affect Your Credit Score

Mortgage delinquencies hurt your credit score in a few key ways:

• Late Payments – Each missed payment that gets reported to the credit bureaus is marked as a “late payment” on your credit report. Too many of these seriously hurt your score.
• Increased Credit Utilization – Your overall credit utilization ratio looks worse when you stop making mortgage payments. This ratio compares your total balances to your total credit limits.
• Length of Delinquency – The longer your mortgage stays delinquent, the more it drags down your score. A 30-day delinquency isn’t as bad as 120 days late.

According to FICO, someone with a credit score of 680 could see their score drop by 85-105 points after being reported 30 days late on their mortgage. The higher your starting score, the bigger the drop – someone with a 780 score before delinquency may see a 140-160 point hit.

The more months you are late, the more your score declines. You may lose another 50-100 points or more if your delinquency stretches past 120 days. A foreclosure will also drive your scores down further – more on that next.

How Foreclosure Affects Your Credit

Foreclosure is the legal process where your lender seizes your home after you fail to make mortgage payments. This usually happens after 4 or more months of delinquency. Steps in the foreclosure process include:

• Notice of Default – Lender files a public notice saying you have defaulted on the loan.
• Auction Sale Date – A date is set for auctioning off the home.
• Foreclosure Sale – If you don’t repay the loan, the home is sold at auction.

Each step of the foreclosure process further wrecks your credit. The final foreclosure drags your score down by an additional 100 points or more in most cases. And it stays on your credit report for 7 years, keeping your credit damaged long after the event.

In addition to the hit from missed payments, a foreclosure does the following credit damage:

• Increases Credit Utilization – Losing your mortgage suddenly removes a large credit account, changing your utilization.
• Hurts Credit Mix – Foreclosure takes away an installment loan – you lose credit mix when this happens.
• Signifies High Risk – Having a foreclosure indicates you are a high-risk borrower to lenders.

Those with higher starting scores tend to see a bigger drop after foreclosure. But even those with lower scores can expect a significant hit – often over 100 points.

How Long Delinquencies and Foreclosures Affect Your Credit

Mortgage delinquencies and foreclosures impact your credit for many years after the events occur. Here is how long these credit report items stick around:

• Late Payments – Remain for 7 years from the date of first delinquency.
• Foreclosure – Stays on your report for 7 years from the foreclosure sale date.

Having these negative items on your credit makes it very difficult to get approved for a mortgage or other loan. Most lenders will want to see at least 2 years of positive credit history after a foreclosure before they consider lending to you again.

How to Rebuild Your Credit After Foreclosure

Recovering from the credit damage caused by mortgage delinquency and foreclosure takes time and discipline. Here are some tips to rebuild credit after foreclosure:

• Get a Secured Credit Card – This lets you prove you can pay on time each month.
• Become an Authorized User – Get added as an authorized user on someone else’s credit card.
• Limit New Credit – Apply for new credit sparingly, if at all.
• Monitor Your Credit – Review your credit reports regularly for errors or signs of fraud.
• Pay All Bills on Time – Pay every bill, not just credit accounts, by the due date.

The longer you demonstrate responsible credit habits, such as paying bills on time every month, the more your scores will rebound. Most people can recover from a foreclosure within 3-5 years of credit rebuilding.

Alternatives to Foreclosure

If you are struggling to make mortgage payments, foreclosure may not be the only option. You may be able to avoid foreclosure by:

• Loan Modification – Your lender adjusts the terms of your loan to make it more affordable. This usually involves extending the repayment term, lowering the interest rate, and/or deferring some payments.
• Forbearance – Your lender allows you to temporarily pause or reduce mortgage payments for a set period of time.
• Short Sale – You sell the home and the lender agrees to accept less than the full mortgage payoff amount.

These options still damage your credit, but not as severely as a foreclosure typically does. If you can’t make your payments, be sure to fully explore alternatives with your lender right away to reduce the credit impact.

Falling behind on your mortgage can happen before you even realize it. But mortgage delinquencies and foreclosure can do lasting damage to your credit that makes everything from getting approved for an apartment to buying a car much harder. If you start struggling with payments, talk to your lender immediately about ways to avoid foreclosure and reduce the credit impact. With time and discipline, you can rebuild your credit even after a foreclosure.