Your credit score affects everything from your ability to rent an apartment to getting approved for a home loan. Creditors and lenders will look at your credit score and your credit report to determine whether or not you’re creditworthy. The better your score and the fewer red flags on your credit report, the lower your interest rate could be if you’re approved.
Having a foreclosure on your credit report can hinder your ability to reach your financial goals. Removing a foreclosure takes patience and time. There are circumstances that you can have a foreclosure removed from your credit report. If you fall into these situations, you’ll need to take steps to get it removed.
What is a Foreclosure?
A foreclosure is what occurs when a mortgage servicer takes over the property of a home due to the borrower no longer being able or willing to repay the loan. The lender is protecting its interest by using this legal process to end the owner’s right to the property. Typically the property is then sold at auction. Proceeds from the sale are used to pay back the original mortgage loan.
There were many foreclosures that occurred from the 2008 housing crisis where borrowers across the nation were unable to pay their mortgage. Eventually, lenders used the foreclosure process to take possession of these properties.
Having your home foreclosure on is a challenging event. But it’s not a permanent situation and it’s possible to come out of foreclosure and buy a new home in the future.
How a Foreclosure Affects Your Credit Score
When there is a foreclosure listed on your credit report, that essentially means that you were late on your payment at some point. Your payment history has the highest weight on your credit score. So that leads lenders to believe that you are less likely to pay them back if they lend to you. Your credit score could drop by well over 100 points depending on the recency of the late payment.
Foreclosures are known as derogatory events in scoring systems like the FICO and VantageScore. The actual impact it will make on credit scores will vary by scoring system and consumer. In any case, a foreclosure can be problematic.
In some cases, you might not be eligible for a home loan that’s backed by Fannie Mae and Freddie Mac for several years after a foreclosure. This mandatory waiting period may keep you out of the housing market for as long as seven years. Even if your credit score recovers during this time, you must wait out this penalty period.
A foreclosure will stay on your credit report for up to 7 years. The good news is that the negative impact it has will become less severe as time goes by.
Does a Foreclosure Fall off my Credit Report?
Like other negative marks, a foreclosure won’t stay on your credit report forever. Seven years after the date of the first missed payment that led to its default is when a foreclosure can be removed. This is known as the date of first delinquency (DoFD) in credit reporting terms.
Therefore, no later than seven years from the DoFD, a foreclosure that’s been reported correctly will be removed. This process of deletion is automatic and the credit bureaus do not need to be notified. The exception is that if there’s something that was incorrect in the foreclosure reporting, you will need to go through the dispute process to alert the credit bureaus.
What about a Short Sale?
If the lender is willing to accept less than the amount that’s still owed on a mortgage loan through the sale of the property, it is known as a short sale. Two things must occur for a short sale to occur:
- The borrower can’t catch up on their mortgage payments because they’re so far behind
- The house is worth must less than the remaining balance on the mortgage due to the current housing market conditions
Lenders will use a short sale as an option to avoid foreclosure. If you receive permission from your lender to sell your home for less than you owe, it depends on your lender how it is reported on your credit report. In most cases, a short sale is treated as a foreclosure so it stays on your credit report for seven years.
3 Steps to Removing a Foreclosure from your Credit Report
A foreclosure can be removed from your report for several reasons including:
- It is over seven years since the DoFD
- The lender is no longer in business
- A voluntary dismissal occurred
- Inaccurate information on the foreclosure was provided by the servicer.
If one of these scenarios occurred in your situation, then you can take action to get the foreclosure removed. Here are the three steps involved in the process below.
Step 1: Find the Information that’s Inaccurate on your Report
There are three major credit reporting bureaus: Transunion, Experian, and Equifax. You will need to review your credit report from all three. Look for the foreclosure entry on these reports to find the inaccuracies. The balance, date opened, account number, and lender name are among the things you should look at.
Make note of the discrepancies that you find. You’ll then want to dispute the entry from all three bureaus. They will have to verify that the entry is correct, if not it must be updated to an accurate status or removed from your report within 30 days. When submitting your dispute letter, be sure to cite the Fair Credit Reporting Act (FCRA) which requires that only accurate information be reported by the credit bureaus.
Step 2: Dispute the Inaccuracies with the lender
If your dispute with the credit bureaus does not end with the foreclosure being removed, your next move is with the lender. Write a letter to the lender stating that the foreclosure entry is not accurate that’s been reported on your credit report. Demand that it is removed from your report.
State in your letter that you will take further action if they do not have the foreclosure removed within 30 days. Make sure to send any supporting documentation you have.
Step 3: Work with a Professional for Help
If you’re pressed for time or prefer having an expert work on your behalf, consider hiring a credit repair company. They can work on your behalf to work with the credit bureaus and lender(s) to remove a foreclosure from your credit report. A reputable credit repair company works with people like you on a regular basis so they understand the process well. Additionally, they may be able to provide guidance or help improve your credit score in other ways.