Your credit score is very important in today’s world. Not only can it affect the interest rate you pay on your mortgage and other credit obligations, it can also affect your ability to get insurance or even a job.
You have to decide whether you want to save your credit or save your home because it’s highly unlikely you can do both! And if you’re a month or two behind on your payments, damage has already been done to your credit score.
To keep your home, you’ll have to put your concerns about your credit score on the back burner for now. By taking a proactive approach to solving your foreclosure and negotiating a workout and then consistently meeting the requirements of that new workout plan, you’ll show creditors your missed payments were a temporary hiccup rather than a long-term problem.
If you keep your home through a forbearance, repayment plan, or loan modification, you can expect a moderate to serious impact to your credit score. It’ isn’t uncommon for your credit report to wind up with 6 – 12 months of missed payments plus a notation that you’ve agreed upon a workout plan. And if you had to miss payments or have late payments with other creditors, the damage will be even more extensive.
The exact score drop you can expect is impossible to know or guess. What you can expect, though, is to have a difficult time getting any type of mortgage loan for at least 2 years. It could be difficult after the 2 year point as well depending on how severe your problems were and how consistently you’ve been able to pay your bills after the foreclosure is over. Your ability to get other types of credit like car loans or credit cards will depend on individual creditors. Credit agencies are required to stop reporting negative information after 7 years (except for bankruptcies, which stay for 10 years), but as you consistently pay your bills the impact will be less and less as you get closer to that 7 year limit.
If you know you can’t keep your home, you can help your credit score by selling it as quickly as possible. A refinance will have no negative impact on your score. A mortgage assumption will probably cause the least impact of all the workout solutions, but your lender has to agree to it and you have to find someone to buy the house for at least what you owe on it. A pre-foreclosure or short sale is your next best option, but these will take anywhere from 6 – 9 months to complete so your credit will be heavily damaged by late/missing payments if you’re unable to make payments the whole time.
According to myFICO (the company that figures your FICO credit score):
Credit bureau reports are limited in how they represent foreclosures today, so it’s generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation.
The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.
For more information, I recommend you check out this article from CNN/Money Magazine…one of their readers asked
We have to relocate because of my husband’s job. Our home value has fallen nearly $100,000. We would like to get rid of it, but we don’t want to go into foreclosure. Someone mentioned a short sale. What impact would that have on our credit rating?
The short answer is a short sale and a foreclosure will do equal amounts of damage to your credit score. It’s the number of late/missed payments that make a huge difference. The big difference between short sales and foreclosures is how quickly you can obtain new mortgage-related credit after each.
In the end, regardless of whether you stay in your home or leave, you’ll probably have a significant amount of damage done to your credit score. That’s simply the way the credit reporting system is designed. But the damage is repairable with time and effort on your part. Right now, though, focus on getting out of the situation you’re in. Once you’re out, you can focus on improving your credit score.
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Tags: credit, tips
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