Mortgage fix may hurt your credit score |
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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.
"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.
"In general, a refinance or loan modification will have a favorable impact on someone's credit score because the amount of their monthly debt obligation is often lower," Benaroya says. "The overall debt can be lower, too, if the lender has forgiven some of the principal on the mortgage. In addition, paying the new mortgage on time for six to 12 months helps begin the process of credit repair."
However, homeowners who make late or partial payments on their new loan modification or refinance will see these actions negatively affect their credit score. In addition, if the mortgage lender has forgiven some of the principal, this could be reported to the credit reporting agencies as "debt satisfied for less than the full amount," which could also negatively affect the borrower's credit score, says Ralph Roberts, a real estate author and host of the KeepMyHouse.com Web site.
Other factors
Other factors -- such as court judgments -- associated with mortgage solutions also can negatively affect a borrower's credit score.
"A court 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 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.
"People think they don't want to do a short sale because they may owe money later, but they need to understand that (a deficiency judgment) could be an issue with a foreclosure, too," says Olsen.
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 "total satisfaction of debt," Roberts says.
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