Mortgage Fixes and Your Credit Scores

When a consumer is desperate to get out from under a huge mortgage payment, he or she may consider many options. Each has a different effect on credit scores.

The choices include:
• Letting the house go to foreclosure
• Signing a deed-in-lieu of foreclosure
• Bankruptcy
• A short sale
• A refinance, or
• A loan modification.

A foreclosure and a deed-in-lieu of foreclosure both have a significant impact on your credit scores, but taken by themselves are not as damaging as a bankruptcy.

If all of your other accounts are current, the foreclosure is a serious blot on your credit report, but is just one blot. And, while it will stay on your credit report for 7 years, your scores can begin to improve in about two years if you are steadfast in keeping all your other accounts current.

A deed-in-lieu of foreclosure is the same – you’re just spared the time and cost of the foreclosure process. In both cases, the lender may obtain a judgment against you for the deficiency – the difference between your loan amount and the price the home sells for after foreclosure. This judgment is another serious hit to your credit scores.

A bankruptcy may allow you to keep your home, but since it means you are defaulting or wiping out many other accounts, it can affect your credit score even more negatively than a foreclosure. A bankruptcy may remain on your credit report for ten years.

Short sales may or may not impact your credit scores – it all depends upon how the lender reports the transaction to the credit bureaus.

In many cases, it is reported just like a foreclosure – It can be reported as a “settled debt,” which will damage your scores. However, in some instances, and if you ask for the concession as part of the short sale negotiation, lenders will report it as “paid in full.”

If you do ask for the concession, be sure to have the bank’s commitment in writing. You should also ask for a written agreement saying that the short sale represents a “total satisfaction of debt.” Otherwise, they can come back later and ask you to pay the deficiency.

Refinance or loan modifications don’t hurt your scores. In fact, they may improve your scores because your monthly debt to income ratio will go down. Of course, that improvement will be wiped out if payments on the new or modified loan are not made on time.

Author: Mike Clover your resource for free credit reports, credit cards, loans, and ground breaking credit news.

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