Why Credit Scores Are Improving for Previously Foreclosed Borrowers

Millions of consumers' credit reports will no longer reflect past mortgage problems, which could open up borrowing opportunities for many of them.

Foreclosures, short sales and bankruptcies are set to fall off credit files for 2.5 million consumers between June 2016 and June 2017, according to analysis from Experian. Of these consumers, 68% have credit scores in near-prime or higher credit segments, which should improve their ability to qualify for a mortgage.

Experian's study in particular looked at so-called boomerang borrowers who foreclosed or short-sold between 2007 and 2010 and have since opened a new mortgage. Roughly 29% of those who short-sold in that time frame have secured a new mortgage, as compared with just 12% of those who went through a foreclosure.

"With millions of borrowers potentially coming back into the housing market, the trends that we're seeing are promising for both the mortgage seeker and the lender," Michele Raneri, vice president of analytics and new business development at Experian, said in a news release.

"In the coming years, boomerang borrowers will be a critical segment of the real estate market. While many of these borrowers have gone through a very difficult time, it is encouraging to see them taking control of their finances with better credit scores and all-around better credit management."

Credit scores for these boomerang borrowers have improved, Experian found. Consumers who opened a mortgage following a foreclosure have an average VantageScore credit score of 680, representing a 20.8% increase from when they went through the negative credit event. And the average credit scores for consumers with a mortgage now who previously short-sold a property have risen 16.5% from the time of their short sale to 706.

Experian also found that these borrowers' credit scores even surpass what they had prior to their foreclosures or short sales.

And both groups are displaying low levels of delinquency. Only 1.5% of borrowers who previously had a short sale are delinquent on their mortgage, below the national average of 2.8%. The delinquency rate for borrowers with a past foreclosure was 3%.