A real estate foreclosure will not necessarily give a borrower seven years of bad credit, but it is a possibility. A foreclosure will reduce the defaulter’s Fair Isaac Corporation (FICO) credit score. The FICO credit score is used by the three major credit-reporting agencies, Equifax, TransUnion, and Experian, to indicate how likely a borrower is to pay back a loan. Defaulting on a mortgage will lower the FICO score and make a future lender less likely to provide additional credit to the borrower.

The fact that a borrower has defaulted on a real estate loan will stay on the borrower’s credit report for seven years. During those seven years, it will be harder for the borrower to take out a loan on a house or condominium. However, with a sufficiently large down payment, the borrower will still likely be able to obtain a mortgage.

Two years after the foreclosure it may become somewhat easier to obtain a new mortgage if there have not been any subsequent credit problems. If the borrower has otherwise good credit (e.g., no history of defaulting on credit card balances) they will not necessarily have “bad” credit for the purposes of getting a car loan or an expanded credit limit on their credit cards. In fact, the credit reporting agencies have different FICO scores for credit cards, automobile loans and real estate purchases. So, while a foreclosure will hurt a borrower’s ability to obtain an automobile loan or a new credit card, it will not necessarily prevent the borrower from obtaining credit.

Additional Resources:

U.S. Courts Bankruptcy Web site:

http://www.uscourts.gov/bankruptcycourts/bankruptcybasics.html

Fair Isaac Corporation:

http://www.myfico.com/crediteducation/questions/Foreclosure-FICO-Score-Affect.aspx

Equal Credit Opportunity Act:

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre15.shtm

Annual Credit Reporting:

https://www.annualcreditreport.com/cra/index.jsp