One of the main concerns of homeowners that find themselves behind on their mortgage when considering their options is the way their credit score is affected by a Short Sale, a Foreclosure, a Deed in Lieu of Foreclosure, or a Bankruptcy.
A more important point to consider is not the actual score but how long will the score be affected and how long will take before the process of repairing the score can begin.
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The Short Sale-
Of all the options to consider the Short Sale is the less harmful and most effective choice for the borrower. This option allows the borrower to sell the property for less than what they actually owe the creditor/bank by obtaining approval from the creditor for the Short Sale through a series of negotiations.
Although the impact of the credit score is only a bit less than the other options (usually 50-75 points), the real benefit is that the debt can be considered settled and releases the borrower from any future liability if negotiated correctly by a trained and qualified Real Estate professional.
The debt shows up on the credit report as “Paid for less than the full amount” and reparations can begin immediately after the process is complete.
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The Foreclosure and Deed in Lieu of Foreclosure-
Avoiding either of these options should be the top priority for a borrower in trouble.
The Foreclosure process is be a very stressful and embarrassing experience which can lead to the borrower being evicted from the property, their personal property being put out on the sidewalk and a huge deficiency judgment following them for many years to come.
A Deed I Lieu of Foreclosure is essentially the same as a Foreclosure but just makes it easier and less costly for the creditor to obtain possession the property.
The debt in either case will show up as an unpaid debt “Foreclosure” on the credit report and the endless phone calls from debt collector will continue for many years to come. Reparations to the credit report are much more difficult and the process will be long and painful.
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Bankruptcy-
A Bankruptcy is a very personal and individual decision to be considered by the in trouble borrower.
The effect of the Bankruptcy on the credit score is essentially the same as a Foreclosure and the borrower will eventually lose the property.
The full effects of a Bankruptcy should be thoroughly discussed with your attorney.
What to do?-
When considering the options the borrower should always seek the help and guidance of qualified and ethical professionals (Realtors, Accountants, or Attorneys)
I have included an article below which I came across which gives an explanation and example of how a score can be impacted by the different options or scenarios.
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How do delinquencies impair credit scores?
CHICAGO – April 23, 2010 – Fair Isaac, which developed FICO scores, used a comparison between two people to explain how mortgage delinquencies affect credit scores.
Fair Isaac derived these numbers from a theoretical calculation based on hypothetical borrowers – one with an initial score of 680 and one with an initial score of 780. FICO scores range from 300 to 850.
The hypothetical person behind the 680 score had six credit accounts, while the person with the 780 score had 10. The consumer with the 780 score had no missed payments other than the mortgage; the 680 example had two late payments before they failed to pay the mortgage.
After a mortgage payment problem, the two scores would look like this:
- After a 30-day delinquency, the 680 score drops to somewhere between 620 and 640; the 780 score declines to 670 to 690.
- After a 90-day delinquency, the 680 score falls somewhere between 595 and 610; the 780 score goes to 645 to 665.
- After a foreclosure, short sale or deed-in-lieu, the 680 goes somewhere between 575 and 595 and 780 drops to 620 to 640.
- After a bankruptcy, the 680 drops somewhere between 530 and 550; the 780 declines to 540 to 560.
Source: CNN, Les Christie (04/22/2010)
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