Credit? Short sale or foreclosure or loan mods?

Credit score with foreclosure and short salesCredit is the golden calf impacting your financial future.

When facing the loss of your home, the decision to modify your loan, short sale your house or just to let your home foreclose can have a long-term impact on your credit. Short sale vs. foreclosure vs. loan modification and the impact on credit is not an exact science. Many variables come into play.

Let’s start by looking at how late payment of your mortgage impacts your credit:

  • 30 days late: 40-110 points
  • 90 days late: 70-135 points

Credit score: foreclosure — A foreclosure will lower your credit anywhere from 250-300 points.

Credit score: short sale — Only late payments will show after a successful short sale. This will lower your credit score as little as 50 points if all payments are made. It is the non-payment or late payment that impacts your credit score. The focus for your successful short sale negotiation is to have your lender report your sale as paid less than full or negotiated. The effect of a short sale can be as little as 12-18 months.

Credit history: foreclosure — Foreclosure will remain on your credit history for 7 to 10 years or more.

Credit history: short sales — A short sale is not reported on a credit history. There is no specific reporting item for “short sale” the loan is typically reported as “paid in full or settled.”

Future home loans: foreclosure-homeowner — A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of 5 years or more.

Future home loans: short sale-homeowner — A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years.

Future home loans: foreclosure, non-primary residence or Investor — An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.

Future home loans: Short sale, non-primary residence or investor — An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed investment mortgage after only 2 years.

Future loans: foreclosure — On any future 1003 loan application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” this will negative impact on future rates.

Future loans: short sales — In a short sale there is no declaration or disclosure on future loan applications.

Here are the credit-reporting requirements straight out of the MHA guidebook (PDF, page 125):

Reporting for short sales should be as follows: Account Status code=13 (paid or closed/zero balance). Special Comment Code=AU (account paid in full for less than the full balance)

Reporting for DILs should be as follows: Account Status Code=89 (deed-in-lieu of foreclosure on defaulted loan)

Man rolling stone up hill is like restoring your creditA big credit-score hit can make many future transactions difficult and costly. Getting back on your feet after a foreclosure is an uphill battle for 7-10 years.

With weaker credit you will be paying higher interest on credit cards debt and auto loans. Future landlords use credit score to weed out perspective tenants. Currently employers are requesting credit reports when interviewing new employees.

Loan modifications have not been around long enough to see any trending impact on credit scores.

According to Maxine Sweet of Experian, “The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.”

Despite the problems a poor credit score can cause, Experian’s Sweet recommends that “people who are in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem. You need to do what you need to do to get your finances back in order.”

The bottom line about credit during a pre-foreclosure or short sale is if you continue paying your mortgage payments during the process your credit hit will be far less. Although this may not be the best solution for homeowners these days, it it important to keep in mind when formulating your exit strategy.

I’m here to help.

Cindy Marty's signature default advocate and realtor.

Cindy Marty: Default Advociate

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