Credit Score affected by Foreclosure Q & A

Is there a difference with respect to a credit score between a house going into foreclosure and a house actually being foreclosed upon? The situation is this. House goes into default and is scheduled for foreclosure sale. Is one’s credit going to be damaged worse if the foreclosure sale occurs? Will one’s credit be better if they are able to pay off the entire loan without incurring additional debt prior to the bank redeeming the property at the foreclosure sale? I realize that there is a negative impact because of the late payments and the foreclosure process being commenced, is that as bad as it gets or does further negative impact result after the redemption? Stated another way, does paying the entire balance off prior to the foreclosure and redemption by the bank improve one’s credit in any way, or at least prevent it from getting worse?

Thank you for your help.

Todd S. Rayan

Hi Todd,
This is a great question. Once you start being late on a mortgage payment the damage is already done to your credit score. I have not seen a difference in credit scores whether you foreclose or if a possible sale takes place before an actual foreclosure. But your creditworthiness to get future mortgage loans is affected if the home actually forecloses. If your home forecloses it will be a minimum of 3 years from foreclosure date before you can buy again. If foreclosure proceedings have started, in the eyes of some lenders this is considered a foreclosure anyways. HUD also says that if foreclosure proceedings have started and you have 120 mortgage late payments on your credit report, it’s counted as a foreclosure. In my professional opinion its better to sell before you foreclose on your home. It just looks better. It does not really matter which happens as far as your credit score is concerned because the damage is already done due to all the late payments.

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