Repairing credit after a foreclosure: Part 1

Have you faced a foreclosure of your home? Read about what financial step to take next to repair your credit.

The recent foreclosure crisis affected approximately 4.5 million American families resulting in a loss of their home. A family who experienced a foreclosure not only lost their home, but lost their ability to qualify for other credit by significantly damaging their credit score. A foreclosure can cause a decrease of about 100 - 150 points off a consumer’s credit score according to the National Consumer Law Center, December 2013.

Not only does a consumer lose their ability to obtain future credit, it may also affect their ability to obtain employment, buy insurance or get into rental housing. According to Michigan State University Extension, many foreclosures were not the fault of the borrower, but because of the loss of one’s job through company lay-offs or through abuse by lenders or servicers of the loan.

A foreclosure will negatively impact one’s credit report for seven years, and if it included a bankruptcy, up to 10 years per the Fair Credit Reporting Act. A person may not be able to obtain reasonably-priced car loans or credit cards.

The decline in a person’s credit score can be compounded by errors made by the reporting company or the credit bureau. If activities are coded wrong, it could drop a consumer’s score unnecessarily. If coded incorrectly, a short sale can appear as a foreclosure, resulting in a future lender denying credit based upon the wrong activity code. A short sale will stay on a person’s credit report for two to four years, versus a foreclosure that will stay on the credit report for seven years. Other errors made by reporting companies include reporting the entire balance of a mortgage as unpaid after a foreclosure instead of crediting the sale of the property against the balance of the unpaid load. A servicer may agree to a loan modification and the consumer may be paying on time under the new loan terms, but the servicer is still reporting as if the loan was delinquent.

Many times, consumers with poor credit scores are stereotyped as irresponsible or lazy when in fact the circumstances surrounding the decline in their credit score were beyond their control. Situations such as divorce, medical illnesses, job losses, unethical servicer or lender practices, or a death of a spouse can lead to a default in credit repayment. The credit score alone does not reflect whether a person was at fault due to their own poor judgment or whether it was due to a circumstance beyond their control.

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