The Impact of Foreclosures on FICO Scores

The Impact of Foreclosures on FICO Scores

The Mortgage Banker Association recently estimated that 1 out of every 200 homes in the US will be foreclosed upon. With the increased number of foreclosures, come many questions about their impact on the FICO score.

There is no denying that a foreclosure is considered a very negative event by the FICO score. Many people believe that it is impossible to rebuild credit after such an event. However, if all other credit obligations remain in good standing, it is possible the FICO score could rebound in just 2 years. Just like any other negative item on the credit report, as time passes, the impact on the credit score will lessen.

Recently, several alternatives to foreclosures have become popular. Some of these include “short sales” and “deed-in-lieu of foreclosure”. It is important to know that as far as the FICO score is concerned, there is no difference between foreclosures and these other options. Each is considered and an account that was “not paid as agreed” will have the same negative impact on the score. However, the account status reported is ultimately the decision of the creditor.

It is important to remember that even though both foreclosure and bankruptcy are considered very negative items by the FICO score, a foreclosure can be isolated to a single account. Often bankruptcies involve multiple accounts that are classified as “not paid as agreed”, so the negative impact can be farther reaching. In most cases, it takes much longer to rebuild credit after a bankruptcy.

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