A lack of overtime, rising unemployment and unmanageable personal debts have put a massive strain on homeowners. Increasing numbers are turning to short selling, mortgage foreclosure, loan modification and filing for bankruptcy in order to escape or manage their monthly house payments. Whilst money problems are alleviated, personal credit scores are plummeting as a direct result.
Craig Watts, public relations director for FICO, stated: "The single worst thing any person can do to their FICO score is to have a serious delinquency such as foreclosure or bankruptcy appear on her credit bureau report." However, a bad credit score is probably a lot better than the alternatives.
How Mortgage Foreclosure Affects Credit Scores
Michael Hollman, an attorney with Village Settlements in Gaithersburg, stated that he'd seen as much as a 300-point drop in the credit score of a client who had a mortgage foreclosure showing on his credit report. Whilst foreclosure will affect a credit score for 7 years, it may start to recover in as little as two years, provided that the repayments on other credit obligations are maintained.
Is Short Selling a More Convenient Mortgage Solution?
Short selling involves reaching an agreement with the mortgage lender to sell a house for less than the outstanding mortgage secured on it. Whilst it is widely accepted as a better mortgage solution that mortgage foreclosure, it will affect credit scores in the same way if it shows on a creditor report as 'settled for less than the full amount due.' However, if the mortgage lender is prepared to record a short sale as 'paid satisfactorily' it needn't affect a credit score at all.
How Filing for Bankruptcy Affects a FICO Score
The National Consumer Law Center in Boston stated that filing for bankruptcy could mean that it is possible to avoid mortgage foreclosure and allow struggling homeowners to catch-up with any missed house payments. According to the myFICO Web site, filing for bankruptcy 'could' have a worse affect on a credit score than mortgage foreclosure because it generally applies to several accounts. It can also remain on a credit report for up to 10 years.
Refinancing and Loan Modifications
Homeowners that choose to refinance or get a loan modification are likely to find that their credit score improves. This is in sharp contrast to filing for bankruptcy and mortgage foreclosure because debt and house repayments are now lower. Homeowners who subsequently fail to maintain repayments on loan modifications will find that their FICO score will deteriorate.
Filing for bankruptcy, short selling and mortgage foreclosure won't be for all homeowners due to the affect they have on credit scores. However, they can provide relief from unaffordable house repayments and further pressure. The Obama administration has recently introduced the Homeowner Affordability and Stability Plan. This provides incentives to lenders who are prepared to provide loan modifications and refinancing deals on mortgages.
Sources
Lerner, Michele. (May 5, 2009). "Mortgage fix may hurt your credit score." The Boston Globe.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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