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Foreclosures Don’t Destroy Everyone’s Credit Score

Study: The year after a foreclosure, 7% of ex-owners have a credit score above 680 and 2% above 740; and all credit scores increased by about 10 points each year.

NEW YORK – A strong housing market over the last few years has put the foreclosure crisis in the rearview mirror, yet many Americans are still haunted by their past housing challenges.

However, new data shows that they should be able to comfortably leave their past behind.

The U.S. had more than 600,000 homes in foreclosure in 2018 – the lowest number since the days of the 2008 financial crisis. Foreclosures peaked at 2.9 million in 2010.

Post-foreclosure homeowners saw it ding their credit score and impact their ability to buy real estate, so LendingTree researchers analyzed how credit scores trend after a foreclosure by assessing the loan terms offered to borrowers with a foreclosure on their record compared to those without.

In general, foreclosures don’t affect a credit report forever, and after seven years they totally drop off the report. However, it’s not an all-or-nothing impact, and loan terms tend to improve before those seven years are over.

At first, a foreclosure can cause credit scores to drop by 150 points or more, but many borrowers still maintain a high score afterward, LendingTree researchers found. In fact, 7% of borrowers end the year of foreclosure with a score above 680 – and 2% finish above 740.

Credit scores also tend to increase by about 10 points per year after a foreclosure, researchers note. More than 30% of consumers with a foreclosure on their credit file have a credit score of 640 or higher within a year of the foreclosure but that percentage jumps to 46% after three years.

Consumers who went through foreclosure may be able to re-emerge as a homebuyer in as little as two years, though they tend to pay a premium. Borrowers with a credit score above 740, for example, paid an average mortgage rate of 5.02% compared to 4.70% for borrowers who did not have a foreclosure on their record, according to the study.

“The foreclosure dominates your credit score in the first two years after,” LendingTree researchers note. “This is evident from interest rates not correlating to credit scores when borrowing two years after foreclosure. However, when borrowing after three years or more, the expected pattern emerges with higher credit score borrowers paying lower interest rates.”

Researchers note that a $250,000 mortgage faces an extra $17,135 in borrowing costs for borrowers with a score above 740 who take out a mortgage just two years following a foreclosure. But that falls to $4,580 for those who wait at least three years after a foreclosure to get a new mortgage.

Source: “The Cost of Foreclosure,” LendingTree (Sept. 4, 2019)

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