So You Think A Foreclosure Doesn't Impact Your Credit Score?

There are many misconceptions about how credit scores work and what happens to yours

if you miss a bill payment, foreclose on your mortgage or short sale on your home. Some borrowers may think that because they never missed a payment, they can just walk away from their homes with relatively little or sometime even no impact on their personal credit scores. This is simply not so. Coming from experts, when a deed-in-lieu or short sale is reported as a partial payment, it's treated as a serious delinquency, just like a foreclosure.

Here are a few ways a mortgage borrower can lose their home: a foreclosure; a short sale, where the home is sold for less than is left owing on the home and the banks generally forgive the difference, or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance. Regardless of which method you have used to eliminate your mortgage, generally credit bureaus will reflect the same penalty towards your credit score. The bottom line to the bank is that they report you paid less than the agreed amount on that settled account.

So even if, as a borrower, you made payments faithfully for years before short selling or doing a deed-in-lieu, your credit score will still have an enormous negative impact on it. Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, which is the worst thing that can happen to your credit score. So, since it's now common knowledge that any kind of delinquent behaviour towards your mortgage will cause your credit score to suffer, the question remains, how much?

Until recently, credit bureaus were reluctant to let consumers know how much of an impact these late and non-payments would have on their scores. Being as there are so many variables, it was, for the most part, very difficult to even begin to answer that question with any sort of accuracy. Now, however, it is possible to get an idea on how many points you will lose by the amount of days your payment is late, as well as by the means you use to get out of your mortgage early.

Fair Isaac, who developed FICO scores, released these numbers as an average go-by. If you are: 30 days late: 40 - 110 points; 90 days late: 70 - 135 points; a foreclosure, short sale or deed-in-lieu: 85 - 160 and a bankruptcy: 130 - 240.

If you are in danger of a mortgage foreclosure, or missing payments, speak to your lender before it's too late. Every situation is different, so find out the best option for your circumstances.

by: Molly Wider

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