Distressed Homeowners See Credit Scores Lowered
Not long ago, an acquaintance approached me about the possibility of listing his property that was many months behind in payments and was worth, in my opinion, about $125,000 less than he paid not that many years ago. Understanding he had numerous choices, each with potential positive and negative financial and legal consequences, I suggested he seek help from a financial advisor and/or legal counsel specializing in real estate matters. I also provided him with the six documents that I have listed below.
In the stress of trying to ward off underwater home mortgages and monthly mortgage payments that are no longer affordable, some homeowners are unknowingly making decisions that could negatively affect their credit for years to come. A recent article, “Mortgage Problems Are Walloping Americans’ Credit Scores,” covers these issues.
Before taking action, property owners need to be clear about the possible ramifications of various options. For example, a loan modification that rolls late payments and penalties into a new principal amount owed can slightly increase, rather than decrease, credit scores.
Similarly, a short sale can cause an excellent credit score to drop by more than 100 points. Ceasing to make payments and walking away from a home might create a credit score tumble of 140 to 150 points, and this can remain on credit bureau files for up to seven years. Filing for bankruptcy could whittle away more than 350 points from a score and remain in the borrower’s credit file for 10 years.
See my previous posts: “Preventing Mortgage Scams” (3/26/09), “One in Five Mortgages Upside Down” (3/4/09) and “Bank Practices Brutal to Buyers and Sellers” (2/1/09).
For more information, see these Q&As from the California Association of Realtors (PDF format, Adobe Acrobat Reader required; download HERE):
Taxation of Foreclosures and Short Sales