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Foreclosure and Your Credit Score
Everyone knows that foreclosure is not good for a credit score. What you may not realize, however, is that many of the popular foreclosure options affect your credit in the same way as foreclosure. To understand the implications of each, let's look at them individually.
Foreclosure:
When you have a foreclosure on your credit report, the rather negative mark will last for a period of seven years. However, the impact will lessen considerably with the passage of time. Your foreclosure, for example, will not affect your score as drastically in year three as it does six months post-foreclosure. The problem with foreclosure and your credit score is that often your mortgage is not the only payment that is being skipped. If all of your other obligations stay current, then the impact of a foreclosure would be lessened. However, if in addition to your mortgage your credit card bills and your car payment are also late, then your score will take a considerable hit.
Deed-in-Lieu of Foreclosure:
A deed-in-lieu of foreclosure (DIL) has become a popular foreclosure avoidance technique for homeowners who can no longer make mortgage payments and do not want to retain their home. Certainly, the DIL offers many benefits over foreclosure-the most important being that you will not be liable for any portion of the loan. That is not true of foreclosure. However, the DIL offers no benefit to your credit score. Just like foreclosure, a DIL will show that the account was not paid as agreed. In fact, under the standard FICO determination (a credit scoring model), a DIL will affect your credit in the exact same way as foreclosure. How long and how much the DIL affects your score will depend on time and the standing of your other accounts.
Short Sale/Refinance:
A short sale is another popular foreclosure avoidance option that allows you to refinance your home with a new lender while the original lender often forgives a portion of the debt. Just like foreclosure and DIL, the short sale/refinance will affect your credit for up to seven years. Your credit report will reflect that the loan was not paid as agreed. Again, how much this affects your credit will depend on the passage of time and your ability to keep up with other obligations.
Mortgage Modification
If you entered into a mortgage modification, the affect on your credit should be positive in that you are no longer delinquent. Once you have entered into a valid agreement, the lender will again start reporting that you have paid the account as agreed. Keep in mind however, that if you were delinquent prior to completing the mortgage modification, the lender may have reported those late payments. Just like most information, the late payments will be on your credit report for up to seven years. However, the effect of a late payment is substantially less than the effect of foreclosure.
Forbearance/Deferment
Just like a mortgage modification, once you have entered into a forbearance or deferment period on your mortgage, you are no longer considered delinquent. The lender should report that your account is current and you are paying as agreed. However, if you had late payments prior to entering into the forbearance or deferment, then the late payments were most likely reported to the credit bureaus. Again, the effects of those late payments should not be as severe as foreclosure, and the effects of the late payments will lessen as you add more and more current payments to your credit history under the forbearance or deferment agreement.
Bankruptcy
If you are considering bankruptcy as a means to get your finances under control, keep in mind that the effects of bankruptcy are far reaching. Unlike foreclosure, which might potentially affect a single account, bankruptcy potentially covers a wide variety of accounts, including auto payments, your mortgage, and unsecured credit, like credit cards. The filing of bankruptcy often automatically disqualifies you for certain loans in the future, and it can stay on your credit report for ten years from the date you file.
When facing financial difficulties, the more accounts that are affected, the higher the impact on your credit score. If you can avoid affecting a wide variety of accounts, then a single negative mark will not have the drastic implications you fear, especially several years later. However, your credit score is just one more reason to speak to your bank quickly. The sooner you work out a payment arrangement or foreclosure avoidance alternative, the better off your credit will be.
Published on BankingQuestions.com 11/21/08
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