Foreclosures, short sales, mortgage modifications and deeds in lieu of foreclosure each have a different affect on your credit. Exactly how mortgage late payments, foreclosures, short sales and deeds in lieu affect your credit really depends on your credit history as well as how the lender reports your situation to the credit bureaus.
Foreclosure Labels
A foreclosure can instantly ruin your credit. Lenders can report late payments up until a foreclosure sale. Make sure you check your credit after the foreclosure is complete. As a result you may not be able to borrow money in the future. Expect declined applications for credit, the possibility of not being able to rent an apartment, limited employment opportunities, and a host of other implications that can follow you for a very long time. A foreclosure remains on your credit report for seven years, labeling you as a bad credit risk. Also to consider is the psychological effects on your life, not just your credit report.
Short Sale and Deeds in Lieu Implications
There is no credit score advantage to a short sale or deed in lieu over a foreclosure. However, if you are reapplying for a loan, under Fannie Mae’s updated underwriting guidelines for new mortgage applications for individuals with various types of foreclosure history on their credit, short sales only have a 2 year waiting period with no additional requirements. If you have a foreclosure on your credit record, you must wait 5 years in order to get new funding, and are subject to additional credit and down payment requirements for 5 to 7 years. Deeds in lieu warrant a 4 year wait with additional requirements for 4 to 7 years. So short sales and mortgage modifications will enable you to repurchase another home within a shorter period of time than if you have a foreclosure or deed in lieu of foreclosure on your credit report history or a bankruptcy.
Of course, I recommend seeking legal and tax advice before making any decisions regarding foreclosures, short sales, mortgage modifications, deeds in lieu and other options such as bankruptcy. Bankruptcy reporting can stay on your credit report anywhere from 7 years to as long as 10 years depending what type of bankruptcy you file.
Mortgage Modification – Less Adverse Credit Implications
As we discussed, a mortgage modification has far less adverse credit implications on your credit report than a foreclosure or short sale. It is to your advantage to choose a mortgage modification to help save your home and your credit if you are in a financial position to make the new adjusted monthly payments and you currently have a variable interest rate loan.
Credit Scores
Some experts may say that your score will go down 300-350 points, but really there is no set 100-point or 150-point drop for a short sale, mortgage modification, deed-in-lieu of foreclosure, or foreclosure. A lot of these negative scores are cumulative. The points drop and get steeper each time there is a negative item reported on your credit report. For example, your score would drop more if you are 90 days past due on payment than if you were 60 days late.
How are Credit Scores Calculated?
Credit scores are generally calculated according to FICO. For more information you can refer to the website www.MyFico.com. This is how the scoring works:
35 percent of your score is based on your payment history;
30 percent is based on the amounts that you owe on your
loans;
15 percent of your score is the length of your credit history;
10 percent is new credit that you’ve opened; and
• 10 percent is based on the various types of credit used.
If your score is regularly around 750, a deed-in-lieu of foreclosure or a foreclosure will probably knock down your score significantly at least a 100 points or more. The methodology to computing a credit score is proprietary. There are three major credit bureaus, Transunion, Equifax and Experian, and they each use a different formula. Here is their contact information:
• Equifax 1-800-685-1111 This one lets you get a free report if you have been denied credit in the last 60 days. Option 2. Make sure that you order only the credit report. Mailed within 48 hours.
• TransUnion – 800-916-8800 – mailed within 6 to 8 business days.
• Experian – 888-397-3742 – mailed within 8 to 10 business days
There are several free ways to obtain your credit report as well:
• Once a year free report: annualcreditreport.com. Remember, though this does include your credit score. In order to get your score, you can order all three reports here for an additional cost.
• Some states have laws requiring the bureaus to provide more than one free credit report per year. Investigate your state rules first before requesting a second free report.
• If you are turned down for credit, employment, or insurance within the last 60 days you can mail the written proof to the credit reporting agency and they will send you a free report or you can apply on line and indicate that you were recently turned down for credit.
• If you were charged higher rates and fees or deposits based on a credit report issued by a credit bureau, you have the right to get a free copy from that bureau.
• If you certify in writing that either you are unemployed and plan to seek employment in the next 60 days.
• If you are on welfare.
• If you were a victim of fraud, you are entitled to request a free report.
Credit Repair
Once you obtain your report, you should check it over carefully for mistakes such as items that do not belong to you, fraud and wrong addresses. You can dispute negative items in writing to the bureaus at the following addresses and request that they delete them from your file which will help to repair your credit. The more negative items that you can have deleted the better. When you dispute an item, the credit bureau contacts the creditor. The credit bureaus will delete disputed items if the creditor does not respond within 30 days to the dispute. These days since most of the creditors are so inundated with delinquent accounts, you have a better chance of creditors not responding.
NCAC
PO Box 9556
Allen TX 75013
Equifax Information Services
P O BOX 740256
Atlanta, GA 30374
TransUnion
Customer Disclosure Center
Trans Union Consumer Relations
PO Box 2000
Chester, PA 19022-2000
Other ways to rebuild your credit:
1. Pay your bills on time. The longer period of time that you pay your creditors on time, the better your credit will get. Remember, credit repair takes a long time because most negative items stay on your credit for 5 years unless you are successful in getting them removed. Bankruptcies stay on anywhere from 7 to as long as 10 years, foreclosures 7 years, deeds in lieu 4 years and short sales 2 – 5 years.
2. With regard to short sales and deeds in lieu, you can try and negotiate with the lender at the time you make your short sale or deed in lieu request that they remove all negative items in this regard in exchange for paying the mortgage off with the short sale or returning the property with the deed in lieu. It does not hurt to ask.
3. Try and pay any outstanding collection items as well and ask the creditor that they delete the negative reporting from your credit report. Most of the credit reporting agencies or creditors will notify the other agencies so that all negative items are removed from all three agencies.
4. Avoid applying for too many credit cards or loans, as having too much outstanding debt is a negative on your report as well.
5. The last item I wanted to mention is applying for credit. Only apply when absolutely necessary because too many applications at one time also lower your credit score.
Yes these are difficult and stressful times for many homeowners who are facing foreclosure as a result of the economy, declining home prices, subprime loans and other unfortunate events. However, you do have options, you can repair your credit over time and as long as you keep a positive attitude and are pro-active in trying to resolve your financial situation. Things can only improve.
