Foreclosure and Credit
How Will a Foreclosure, Short Sale, or Loan Modification Affect My Credit Scores?
Foreclosure and Credit....If you're having difficulty paying your mortgage on time, you may be facing a tough mortgage default decision. Chances are you're wondering if you should allow the mortgage to go into foreclosure, do a deed in lieu of foreclosure, request a loan modification, or a short sale.
As a credit attorney, I am often asked about foreclosure and credit ratings. The question is "How does a foreclosure, short sale, or loan modification affect your credit scores?" The impact to your credit scores can be a key factor in making a good decision. Why? Because each of your mortgage default options can impact your credit scores differently and also have varying affects on your ability to rebuild your credit.
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Foreclosure and Credit - A tale of 2 HomeownersLisa's Story...
A homeowner, lets call her Lisa, is facing foreclosure. Her husband had been unemployed for over a year and their adjustable rate mortgage increased their mortgage payment by an additional $400 per month, so she is now 6 months late in her mortgage payments.
By now, Lisa's credit scores have already dropped significantly as a result of the 180 days late payments. So whether she does a loan modification, deed in lieu of foreclosure, short sale, or foreclosure will not make a big difference in her credit scores. Her credit reports will reflect "greater than 180 days late" and "foreclosure".Tina's Story...
Tina is also a homeowner. However, when Tina's husband lost his job, she realized that she would not be able to continue to make her mortgage payments on time. Tina applied for an apartment before her credit report reflected any late payments and then moved to her new apartment.
After her mortgage payments were 60 days late, Tina requested her mortgage lender to approve a short sale. She sold her home within 30 days. As a result, her credit reports show "90 days late payments" and "paid in settlement for less than full amount".
The point of the two stories is the impact to your credit is primarily based upon how far you get behind in your mortgage payments. So, regardless of whether you choose a foreclosure, loan modification, short sale, or deed in lieu of foreclosure, the sooner you act the better. Although, the amount of money the lender loses, state laws, and other factors can also affect the credit scores' impact, minimizing the length of delinquency is the primary factor.
Foreclosure and Credit - Common Misconception
Like many people, you may be under the common misconception that the reporting of your loan as a "foreclosure" or as a "short sale" that affects your credit scores. But with regard to foreclosure and credit, it's actually the reporting of the delinquent mortgage payments themselves that cause your credit scores to drop.
Most lenders don't distinguish between a foreclosure or deed in lieu of foreclosure, when reporting your information to the credit bureaus. Likewise, a short sale may also be reported as a foreclosure.
However, whether you were 60 days late or 120 days late can make a big difference in your credit. Not only can make a difference in your credit scores, but may also affect how long it takes for you to rebuild your credit.
Further, it may be the difference between qualifying for a new mortgage in 2 years versus 3 years or more. Why? Because many mortgage underwriting guidelines may require you to wait at least 3 to 4 years following a mortgage default with 90 days late or more.
So when deciding between a foreclosure, short sale, deed in lieu of foreclosure, or simply walking away, make sure you know how to minimize the impact to your credit scores.
Get credit information and decide for yourself who to trust to help legally improve your credit.
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