Is the economy improving? Despite what general trends may indicate, the only economic measure which really matters is how you’re doing personally. Since 2008, foreclosures have been an on-going issue for millions of Americans. Even today, many homeowners are still feeling the effects of the turbulent housing market. If you’re one of these homeowners, we’re here to help.
If you’re faced with the potential loss of your home, you have two options: a short sale or a foreclosure. We’ll take a look at each of these – what they are, how they work and how they can each affect your credit score.
A short sale is when you repay your home loan for less than the full, original amount. The actual amount is determined by the buyer, seller and lender. In order to sell short, you’ll need to prove hardship such as a massive change in finances or mandatory job relocation.
While a short sale isn’t ideal, in most cases it’s a better alternative to foreclosure. If you’re falling behind on your mortgage payments, your first course of action should be to look how feasabile a short sale will be.
Generally, the more current you are on your mortgage payments, and the earlier you can plan for a short sale, the less hit you’ll take on your credit score.
State laws vary when it comes to short sales. In some states, you might eventually have to pay the difference between what you owe and what was repaid. The lender may sue you for the difference. This deficiency judgment could have a negative impact on your credit score.
In other cases, the lender will use the loss as a tax write-off. This means the IRS will treat this as income going to you. You’ll be taxed on this loss. While this can potentially be a pretty big fee, the good news is you won’t have the deficiency judgment on your credit score.
When it comes to a short sale, words matter. Most of the time, lenders will report your short sale as “settled.” This means you repaid less than what you owed, and it’s not something you really want to see on your credit report. Instead, you really want lenders to use the word “paid.” This will often require a personal request on your part to your lender. Lenders won’t always agree to list your case as “paid,” but it’s at least worth asking about.
A foreclosure is when the market conditions have made it impossible for you to sell your home, and you also can’t make your mortgage payments. Simply put, you have to just walk away – often even physically leaving the home.
In a word: terribly. A foreclosure is one of the worst things you can do to your credit. We understand -- nobody wants to lose their house. Often a foreclosure is an event well beyond the homeowner’s control.
The good news is a foreclosure doesn’t happen overnight. Your mortgage company will typically take action 30 days after you’re first late with your mortgage payment. This will result in a negative mark on your credit report, but at least you’ll still be in your home.
Your bank will take action when you’re 90 days delinquent with your payments. From that point, the actual foreclosure process will take about two or three months. In total, a foreclosure typically involves about six months of missed payments.
The bad news is this is six months of pretty negative information which will end up on your credit report. The good news is you have some time to hopefully come up with a solution to prevent the loss of your home. Within the first 90 days of a missed payment, your lender might be willing to work with you. After 90 days, however, you won’t have nearly as many options. So if foreclosure seems like a possibility, reach out for help and information as soon as possible.
There’s no sugar-coating it: a short sale or a foreclosure can really be a bit hit to your credit score. A foreclosure will stay on your record for seven years, and drop your credit score anywhere from 85 to 160 points or more.
The more you know about the situation, the better you’ll be. If your ability to make your mortgage payments is in trouble, don’t give up hope. Instead, do some research and take action. There are usually options to slow down and even stop a foreclosure. A little information can go a long way.