This is a question I receive a lot from people. Please understand these are generalities. Everyone’s credit will be affected differently depending on other factors. I’m also not a credit expert or credit repair expert. However, I’ve done enough of these to know generally what happens.
When helping a homeowner I’d like to be able to intelligently explain the effects of all these options below. What effect does the following options have on ones credit report? Are there any other things a homeowner should be concerned about when considering these methods to avoid foreclosure?
– short sale
– loan modification
– mortgage refinancing
– deed in lieu of foreclosure
Any option is better then just letting the property go to foreclosure, however, you must understand that no matter what happens, the homeowners credit has already been hit because of late payments.
All of the options listed above generally don’t occur unless the homeowner has been late on payments except for maybe mortgage refinancing. That you can still do without being late.
A credit score will be affected based on how many late payments are missed. If only one is missed, credit score is affected just a bit. As more late payments occur, credit score will be affected more.
A lot of times, if homeowners are not making mortgage payments, they may not be making other payments as well, which also affects their score.
A mortgage refinance generally needs be done early in the process because they look at your credit score more than anything. So if the homeowner can do a mortgage refinance, this will not have any impact on their credit as long as they are current.
A forbearance usually happens sometime after a payment or two is missed. The lender will agree to add on what was missed to the back of the loan. So credit is affected slightly, but should recover soon.
Loan modification, again, homeowner has probably missed some payments, needs some help and the lender agrees to lower the interest rate and modify the terms to help the borrower. Credit is affected because of missed payments. Again not a huge credit concern.
Deed in Lieu, the homeowner basically walks away, gives the house back. Credit will be affected a little bit more but should recover with time and as long as they are current on other obligations. It may show up on credit report as a settlement.
A short sale is another type of settlement. Both parties agree on a certain price which settles the debt. Depending on how it’s settled, credit is usually affected for a year or two.
Foreclosure is not a good option. Neither party gets what they want and the effects on credit can be 3-7 years. Try to avoid this as much as possible.
Bankruptcy is the worst. This will stay on their credit for 7-10 years and make it very difficult to have borrowing power for some time. It will be a derogatory mark against them for a long time. Try to avoid this as much as possible.