Credit Score and the Impact of a Foreclosure
Put simply, a credit score is an indicator of a borrower’s likelihood to repay debt and repay it on time, based upon the borrower’s payment history. Lenders such as credit card companies, mortgage companies, banks, and others, use a borrower’s credit score to determine how much money to lend to them and at what interest rate.
High credit scores indicate a greater likelihood of the borrower to repay debt on time, so they are extended larger loans at lower interest rates. Low credit scores indicate a borrower is less likely to repay debt on time, making the borrower a credit risk. These borrowers will be extended smaller loan amounts (if at all) at higher interest rates.
While a borrower’s credit score is based upon a number of factors, the most important factor is payment history. When a borrower’s mortgage loan goes into foreclosure due to missed payments, their credit score takes a massive hit: every missed payment is a separate negative event reported on the borrower’s credit report—along with the foreclosure itself—and these events stay on the report for up to seven years. The borrower will have a hard time applying for loans, including mortgages, while these negative events remain on their credit report, and loans that are approved may likely include very high interest rates.
Additional Resources:
“Credit Scores,” Federal Trade Commission, https://consumer.ftc.gov/articles/credit-scores
“How Is My Credit Score Calculated?,” Chad Langager, https://www.investopedia.com/ask/answers/05/creditscorecalculation.asp
“How Many Mortgage Payments Can You Miss Before Foreclosure?,” Jim Akin, https://www.experian.com/blogs/ask-experian/how-many-missing-mortgage-payments-before-foreclosure/
“Rebuilding Your Credit After a Foreclosure or Eviction,” Equifax, https://www.equifax.com/personal/education/credit/score/articles/-/learn/rebuilding-credit-after-foreclosure-eviction/
*Disclaimer: This blog post is for informational purposes only. Nothing contained in this post shall be construed as legal advice.
