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The Long-Term Impact of Foreclosure

Foreclosures can leave a lasting impact on a homeowner’s credit score, but according to a new report from LendingTree [1], current conditions are positive. There were over 600,000 homes in foreclosure in the U.S., the lowest since the financial crisis, when foreclosures peaked at about 2.9 million in 2010.

“To assess how long the damage from a foreclosure lingers, LendingTree conducted a lengthy study of how credit scores trend after foreclosure,” said LendingTree Chief Economist Tendayi Kapfidze. “We also assessed the loan terms offered to borrowers with a foreclosure on their record compared to those without.”

Additionally, LendingTree found that the impact from foreclosure does not remain on credit reports forever, falling off after at least seven years. Credit scores and loan terms start to improve well before those seven years as the foreclosure recedes into the background and is superseded by more recent information. More than 30% of people with a foreclosure on their credit file have a credit score of 640 or higher within a year of the foreclosure. That number rises to 46% after three years.

Those have have dealt with foreclosure are able to reenter the market within two years, but there is a cost. LendingTree reports that those borrowers with a credit score above 740 paid an average rate of 5.02%, compared with 4.70% for borrowers who have never had or did not reflect a foreclosure in the previous seven years.

“The keys to recovering from foreclosure are the same as those required to prudently manage your personal finances and credit score,” Kapfidze adds. “Don’t overextend yourself when borrowing, pay on time, keep revolving balances low and maintain an emergency fund so you can meet your obligations if there is a disruption to your income. This should allow your credit score to recover, as well as restore your access to credit more quickly.”