So, you wake up one day and decide that the home on which you owe more than the value is no longer a good investment. With the monthly payments killing you, you decide that the right time to unload the property is now. Unfortunately, with the value such as it is, the only way to facilitate this is via an option other than simply selling the home and paying off the mortgage note. This is done through short sale, a foreclosure or providing a deed-in-lieu of foreclosure. Getting this done will get rid of your white elephant house, but what will a move like this do to your credit?
To understand this you first need to understand two very basic
concepts. The first is that all of these options are, in the eyes of
the bank, a reflection of poor credit behavior. It does not matter if
you sell it for less than the loan balance or if the bank had to
actually seize the property. A loan with your name on it did not
perform as per the agreed upon payments, and that is bad. The second is
that poor use of credit will lower your score. Since your score uses
historical data to predict future data, you are going to be looked at
with greater scrutiny when seeking future credit.
So you know you
are going to take a credit hit, but how much will your score suffer?
In the past, this was basically a matter of speculation. Now, thanks to
Lee Christie at CNN Money,
the veil has been pulled back on this mystery. In a recent article,
Christie described a process whereby Fair Isaac, the folks behind the
scoring system, created example homeowners at both sides of the credit
spectrum, i.e. one with a 780 and one with a 580. They then took the
dummy profiles through a series of late payments, a short sale, a
deed-in-lieu of foreclosure, a foreclosure and a bankruptcy to get
definitive figures for the impact of their scores.
When analyzed,
the data showed that any one of the aforementioned outcomes would drop
your score by significant numbers. The amount will vary a bit based on
your original score, but you can expect somewhere between 85 and 160
point drop in your score. Interestingly enough, the specific impact is
more driven by the original credit score and not the type of
resolution. Higher starting scores will suffer a greater decline than
lower scores. No matter what, you expect some years of tough credit
approvals and higher rates.
In the area of mortgage lending
expect a longer wait and tougher hurdles. Banks look at more than just
the score when determining the decision on a home loan and one area upon
which they are unwavering is mortgage default. In general, you can
expect to wait 5 or more years to buy a home under a Fannie Mae loan
regardless of you score at the time of application. If the default was
by choice, sometimes called a strategic default, you can expect a
minimum of 7 years.
In the end, a decision like this is a
balancing act. On the one hand, being saddled with unaffordable debt
can have a detrimental impact on day-to-day living resulting in undue
hardship. On the other, emerging from this debt can affect your ability
to get credit for years to come. With a bit of understanding of this
impact, however, you can make an informed decision and act accordingly
to do what is right for you and your family.
Douglas Katz
Sales Manager – Private Label Banking
Chicago Bancorp
Office: 312.738.6079
Alt: 708.406.9092
FAX: 312.491.5337
E-mail: doug@chicagobancorp.com
Website: www.bankerdoug.com
Blog: www.bankerdougblog.com
One
other caveat. You should seek the advice of an attorney before deciding
which alternative to pursue because there are other considerations
besides the impact on your credit score.