Homeowners who cannot pay the mortgage may be desperate to get rid of their obligation. Depending on their situation they may have a few options available to them: refinance, loan modification, short sale, foreclosure or bankruptcy.
The single worst thing any person can do to her FICO score is to have a serious delinquency such as foreclosure or bankruptcy appear on her credit bureau report, says Craig Watts, public relations director for FICO, which developed the FICO score. Damaged credit can make life miserable for borrowers, making it more difficult to secure a future mortgage or other loan, rent an apartment or even get a job.
A mortgage solution’s potential to damage a credit score depends on a borrower’s individual financial circumstances and past credit history, Watts says, “The impact that serious delinquencies have on FICO scores can vary from person to person, based on what other information is on the person’s credit bureau report.”
Lenders report these transactions to credit bureaus, and mortgage solutions will have an impact on the borrower’s credit score, also known as the FICO score. Watts reports that FICO 08, a revamping of the credit score formula, has not altered how mortgage solutions affect a borrower’s credit score. “The FICO 08 formula gives appropriate weight to consumer credit information including foreclosures” based on the way consumers have handled credit obligations recently, Watts says.
Foreclosure and bankruptcy will have a significant negative impact on a borrower’s score. Attorney Michael Hollman, with Village Settlements, says he’s seen as much as a 300-point drop in the FICO scores of clients who have a foreclosure listed on their credit reports.
A foreclosure will remain on a credit report for 7 years, according to FICO’s myFICO Web site. However, a FICO score may begin to rebound in as little as 2 years if the borrower keeps all other credit obligations in good standing, according to the site. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.
Some homeowners who face foreclosure may turn to the bankruptcy process for help. According to the National Consumer Law Center in Boston, a bankruptcy may make it possible to stop the foreclosure process, allowing borrowers to catch up on missed payments.
Borrowers can use bankruptcy to discharge other debts, freeing up money for the monthly mortgage payment. However, the reality is that in many cases, a bankruptcy just buys time until the homeowner defaults again on the loan.
In addition, a bankruptcy may have a greater negative impact on a borrower™s FICO score than a foreclosure, according to the myFICO Web site. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.
A bankruptcy remains on a credit report for 7 to 10 years, depending on the nature of the bankruptcy.
Bankruptcy is not the only alternative to foreclosure and a preferred alternative is a short sale. A short sale occurs when a lender agrees to allow a homeowner to sell a property for less than what the owner still owes on the mortgage.
A deed in lieu of a foreclosure is another alternative. It occurs when homeowners deed their home to the bank without going through the extra time and cost of a lengthy foreclosure process.
Homeowners can only qualify for a deed in lieu of foreclosure if they have just one mortgage, or if they have multiple liens from the same lender. Banks require that the homeowner attempt a short sale before they will agree to accept a deed in lieu.
A short sale is less damaging to a homeowner’s credit score than a traditional foreclosure. Credit bureau reports are limited in their reporting and while foreclosures are represented as such, short sales are represented as settled accounts.
While foreclosures and their alternatives are all treated as serious delinquencies on a credit report, one significant advantage of a short sale is that as part of sale negotiations, homeowners can ask the lender to report to the credit bureaus that the mortgage has been paid in full.
A lot depends on how the bank reports a short sale, most often, it will be reported as a ‘settled debt’ but it can even be listed as ‘paid in full’ by some lenders.
Even if the borrower can win this concession, some credit damage may already have occurred in the months leading up to the short sale.
The lender is likely to have reported late or missing payments to the credit bureau, so homeowners may find that their credit score has been damaged even before a short sale takes place.
Two other techniques often used to stave off foreclosures, loan modifications and refinances – however, loan modifications are known to be extremely frustrating and even if the banks agree to modify the loan, which is extremely rare, the terms of these modifications force most homeowners back into default in less that 90 days. Furthermore, refinancing is not typically an option for most buyers as their homes are no longer worth what they originally paid for them and thus the banks will not provide the loan.
How Your Credit Score May Be Affected
The points lost on your FICO score may be as follows:
- Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. A sellers can take a hit of 250 to 300 points. This means if a seller’s FICO score before foreclosure is 680, it could dip as low as 380. - Short Sale
The damage to a credit report from a short sale is much less drastic and in the range of 80 to 100 points. The hit will be indicated as a ‘settled account’, or if your real estate agent knows what they are doing and is successful they may even be able to convince the bank to agree report the account as ‘paid in full’.
Waiting Period Before Buying Another Home
- Foreclosure or Deed-in-Lieu of Foreclosure
A seller who wants to buy a home after foreclosure can expect to have to wait about 36-60 months before being able to get a loan with a reasonable interest rate. - Short Sale
For a short sale, the seller should be able to buy another home with a reasonable interest rate after about 18-24 months.
Other Factors That Could Affect Your Score
Other factors such as court deficiency judgments associated with mortgage solutions also can negatively affect a borrower’s credit score.
A court deficiency judgment posted to a person’s credit report will almost always negatively impact her FICO score, Watts says.
For example, in some foreclosures and short sales, a lender may seek to obtain a deficiency judgment against a homeowner. A deficiency judgment obtained by a creditor in court can be used to force borrowers to pay the difference between the amount of money collected in a short sale ”or a sale after a foreclosure” and the outstanding balance of the mortgage.
Some people mistakenly think deficiency judgments do not apply to foreclosures. Foreclosure laws vary by state, but consumers should be aware of the possibility of a deficiency judgment at any time up to the statute of limitations after a foreclosure (2 years in Ohio).
Many homeowners falsely assume they don’t want to do a short sale because they may owe money later, but they need to understand that the handling of deficiency judgment is part of the short sale negotiations and a Realtor who specializes in these types of sales is usually able to get the bank to agree not to pursue the homeowner for a deficiency judgment and to accept the short payoff as payment in full. Also, if a homeowner is eligible, and if their lender is participating in the Home Affordable Foreclosure Alternatives (HAFA) Program, the lender is required to accept the payoff as payment in full and agree not to pursue the homeowner for the deficiency.
To avoid a deficiency judgment related to a short sale, borrowers should be careful to have a written agreement from the lender that says the sale represents a œtotal satisfaction of debt.
If you are a homeowner who feels they might qualify as a short sale candidate and are looking for an agent who specializes in these types of sales, or just need guidance, please give us a call at 614.332.6984 as we’d be happy to assist you in exploring this option and locating a buyer for your home!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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