If you are facing foreclosure, or even are just behind on your mortgage payments, it may be time to consider your alternatives, and what the credit ramifications are for those alternatives.
The fact is, any time you get behind on your payments of any kind, your credit is bound to be affected. Now in the case of going into foreclosure, the credit “hit” will be the worst. But even being behind on a few payments is often basis for your lender to make the credit reporting bureaus aware of your problem.
Your Credit Score
As you probably know your credit score is important. A good score can save you many thousands of dollars in interest charges. Plus it can help you get credit for things you and your family need. Your FICO score, which stands for Fair Isaac Corporation, the originators of the index, is used by almost every lender to determine an applicants ability to pay back a loan.
Problems with paying bills will affect your credit score. A foreclosure will affect your credit score severely for a long time… usually in the neighborhood of 7-10 years.
Selling your home as a short sale will also affect your score.
So how does payment problems affect your actual score. According to a report released by FICA here’s how it breaks down.
- 30 days late: 40 to 110 points
- 90 days late: 70 to 135 points
- Foreclosure, short sale or deed-in-lieu: 85 to 160
- Bankruptcy: 130 to 240
Some experts dispute these numbers. Many say that a foreclosure will effect your credit score by 200-300 points. Some also say that, although the initial hit for a short sale may be the same, the score will bounce back more quickly, and the borrower can get another home loan after about two years.
Some also say that if the borrower was current on their mortgage, the credit score would take less of a hit for less of a time. This seems to make sense.
So What’s The Truth?
Danny Altenburg from P.A. Mortgage in Safety Harbor knows what it takes to re-establish credit. Here’s some guidelines he uses to determine credit worthiness after major financial issues like foreclosure, short sales, and bankruptcy.
- Deed-In-Lieu of Foreclosure – 4 years before credit can be re-established
- Pre-Foreclosure and Short Sales – depends on Loan To Value (LTV) – less than 80% – 2 years, 80% to 90% – 4-7 years.
- Foreclosure – At least 7 years before you can begin to re-establish credit. Typically more like 10 years unless you begin to significantly improve your payment history.
- Bankruptcy (Chapter 7 or 11) – 4 years before credit can be re-established
- Bankruptcy (Chapter 13) – 2 years after discharge or 4 years after dismissal date
In a bankruptcy situation it all depends on whether the bankruptcy plan has been completed.
What Does It All Mean?
So the moral of the story is, do whatever you can to avoid foreclosure. And if you are having trouble making payments, contact your lender as soon as possible to try and work out a payment plan.
If you have a hard time getting the lender to work with you, then perhaps you should consult Brown & Associates. We want to help.