How Does a Foreclosure Affect My Credit and My Future Options?

A foreclosure stays on your credit reports for 7 years from the first missed payment that led to it, and the late payments before it stay for 7 years as well. The score drop depends mostly on where your score started, and full recovery can take years. To get a new mortgage, the usual wait after a foreclosure is 7 years for a conventional loan sold to Fannie Mae (3 years with documented hardship), 3 years for FHA, and 2 years for VA. USDA generally looks back 3 years, but a government loss on a prior USDA loan within 7 years requires a USDA-approved credit exception. A short sale (selling the home for less than you owe, with the lender's approval) or a deed in lieu (signing the home over to the lender instead of foreclosure) shortens the Fannie Mae wait to 4 years.

How long does a foreclosure stay on your credit report?

The Fair Credit Reporting Act bars credit bureaus from reporting most negative items, including a foreclosure, for more than 7 years. Experian, one of the three national bureaus, counts those 7 years from the first missed mortgage payment that led to the foreclosure, not from the sale date, and then deletes the entry.

The late payments come first. A payment shows as late on your report once it is at least 30 days overdue, and each one also stays for 7 years. Federal rules bar a servicer from starting foreclosure until you are more than 120 days behind, so by the time the foreclosure is reported, your report already shows a run of late payments. How many late payments lead to foreclosure covers that timeline.

The federal 7-year limit does not apply to a credit report pulled for a loan of $150,000 or more, which includes many mortgages. For your next home loan, the program waiting periods below matter more than when the entry drops off.

How much does a foreclosure lower your credit score?

There is no fixed number of points. FICO's 2011 study of sample borrowers who started at 680, 720, and 780 found:

• A short sale, deed in lieu, or settlement hurt the score about as much as a foreclosure.
• Scores could begin improving before full recovery, full recovery took years even with all other bills paid on time, and higher starting scores generally took longer to recover.

Payment history makes up 35% of a FICO Score, according to Experian, so on-time payments on every other account are the main way to rebuild. Experian also notes that a foreclosure can mean higher interest rates or fees on new credit while it is on your report.

How long until you can get another mortgage?

Each loan program sets its own waiting period. These are the current rules for the main programs:

Conventional loans. Fannie Mae measures from the completion date to the date your new loan closes and funds. Between 3 and 7 years after a foreclosure, even with hardship approved, you can only buy a primary home with at least 10% down (a maximum 90% loan-to-value ratio) or do a limited cash-out refinance; second homes, rental properties, and cash-out refinances wait the full 7 years. After any waiting period, you also need traditional credit, meaning accounts such as credit cards or installment loans that appear on your credit report (a file with too few accounts does not qualify), and an approval from Fannie Mae's underwriting system or a qualifying credit score. Hardship here means extenuating circumstances: a nonrecurring event beyond your control, such as a job layoff or serious illness, that caused a sudden, significant, and prolonged loss of income or a catastrophic rise in expenses. You document it and explain in writing why you had no reasonable alternative to defaulting. A strategic default, walking away while you could pay, does not fit that definition.

FHA loans. The 3 years are counted to the date the lender opens your FHA case. An exception is allowed for documented circumstances beyond your control, such as a serious illness or the death of a wage earner, if you have reestablished good credit since. Divorce does not count, unless the mortgage was current at the divorce and your ex-spouse kept the home and later lost it. A job transfer that left you unable to sell does not count either. After a short sale, there is no wait if you made every mortgage and installment debt payment within the month due for the 12 months before the sale.

VA loans. A VA lender may disregard a foreclosure finalized more than 2 years before closing. Within 1 to 2 years, approval is unlikely unless you have used new credit and paid it on time since, and the foreclosure was caused by verified circumstances beyond your control, such as unemployment or uninsured medical bills. For a short sale or deed in lieu, the lender may require no waiting period if your payment history on the property was unaffected beforehand and you voluntarily communicated with the servicer or loan holder. If the foreclosed loan was itself a VA loan, the entitlement you used on it (the part of your benefit VA guaranteed on that loan) is not restored until VA's loss is repaid in full, even when VA does not treat the loss as a debt you owe. That does not by itself bar a new VA loan if you meet the credit standards. If the old loan did leave a debt to VA, VA's Debt Management Center (1-800-827-0648) arranges repayment.

USDA loans. A foreclosure, short sale, or deed in lieu within 36 months before submission to USDA requires a credit exception, the lender's documented approval despite adverse credit, for manually reviewed files. USDA's automated underwriting results of "Accept" or "Accept with Full Documentation" require no exception for these events. The lender can weigh whether the cause was temporary or beyond your control, and whether the new loan would significantly lower your housing costs. A government loss on a previous USDA direct or guaranteed loan within 7 years of submission still requires the lender to request a USDA-approved credit exception, even with automated acceptance. USDA reviews the supporting documents and makes the final eligibility decision in those cases.

Is a short sale or deed in lieu better for your credit than a foreclosure?

Not for your score, based on the FICO study above. The difference is in the waiting periods: Fannie Mae's conventional rules are shorter (4 years instead of 7), and FHA gives a shorter path only after a short sale you were current on. A VA lender may require no wait after a short sale or deed in lieu if your payment history was unaffected beforehand and you voluntarily communicated with the servicer or loan holder. If you expect to buy again with a conventional loan, the shorter wait is the main reason to pursue a short sale or deed in lieu instead of letting the foreclosure finish. Alternatives to foreclosure explains how to apply for each, and how to get out of a mortgage covers selling or handing back the home before default.

What can you do now to qualify sooner?

1. Find the completion date. Your waiting period runs from the date the foreclosure, short sale, or deed in lieu was completed or ownership transferred. Keep the deed, sale documents, or Closing Disclosure, because lenders ask for them when the credit report does not show the date.
2. Keep traditional credit open and current. Fannie Mae requires traditional credit after the waiting period, and VA looks for new credit paid on time.
3. Document any hardship now. Layoff notices, medical bills, and insurance records are what lenders use to approve a shorter wait.
4. Compare loan types when you are ready. An FHA or VA loan may be available years before a conventional one. Getting a mortgage with a low credit score covers which loan types to compare first.

How foreclosure works explains the process that leads to these dates.