mortgage

Mortgage fix may hurt your credit score

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 seven to 10 years, depending on the nature of the bankruptcy.

Short sales and other alternatives

Bankruptcy is not the only alternative to foreclosure. A substitute is a short sale, which 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," Olsen says.

Some people believe a short sale or deed-in-lieu of a foreclosure is less damaging to their credit score than a traditional foreclosure. However, that's not the case, according to the myFICO Web site.

According to a Q&A on the site, "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 site goes on to state that foreclosures and their alternatives are all treated as "serious delinquencies" on a credit report and that the alternatives "will be considered no better or worse for your FICO score" than foreclosures.

However, one 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, says Olsen.

"A lot depends on how the bank reports a short sale," Olsen says. "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, says Jacob Benaroya, president and managing partner of the Biltmore Capital Group, buyers and sellers of nonperforming mortgage loans based in Rochelle Park, N.J.

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"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 significantly even before a short sale takes place," Benaroya says.

Two other techniques often used to stave off foreclosures -- loan modifications and refinances -- may actually boost a borrower's credit score, Benaroya says.

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