Understanding the Financial Implications
The three most-likely outcomes for distressed borrowers are: loan modifications, short sales or foreclosures.
All three have a negative impact on borrowers’ credit scores. The size of that impact, however, may vary.
Modifications
Most struggling homeowners will first attempt to modify their current loan in order to obtain lower monthly payments for a specified time period. Loan modifications have been pushed by the federal government through its Making Home Affordable programs, which include the Home Affordable Modification Program (HAMP). Answers to frequently asked questions about Making Home Affordable programs can be by clicking here.
In theory decreasing monthly mortgage payment into a manageable amount is great; however, many lenders won’t consider modifying borrowers’ loans unless they’re at least 90 days behind on their mortgage – which can cause a significant drop in their credit score (50-100 points) . The road to credit-score recovery begins when the modification is complete.
Short sales
When modification attempts don’t work, the next step is contacting an agent to sell their home. Unfortunately, this is when the reality sets in that the house is worth less than what is owed. In such cases, a short sale may be required.
Short sales typically harm credit scores more than loan modifications but less than foreclosures. A line like “settled for less than full amount” likely will be inserted in the borrowers’ credit report. Such a report can subtract 100 points from credit scores.
Short sales can linger on credit reports for as many as seven years.
Foreclosures
When modifications and short-sale attempts fail, borrowers typically have one final option: foreclosure. Borrowers who undergo foreclosure will see their credit scores plummet after the scores are first tarnished by the nonpayment of the mortgage. In most foreclosure scenarios, credit scores continue to decline until the process ends, which could be as long as one to two years.
According to a recent FICO report, credit scores can dip by as many as 100 points following a foreclosure — not counting the damage caused by the late payments leading into the foreclosure.
– Jocelyn Predovich – Limetree Lending Group – jocelyn@limetreelending.com
Colorado Foreclosure Hot Line
877-601-HOPE (4673)