Foreclosure Options and Their Credit Score Impact

Homeowners facing foreclosure undoubtedly wonder whether there are options less severe to their credit scores. For example, will a short sale or deed-in-lieu of foreclosure be less damaging to your credit score? Unfortunately, the answer may not be very encouraging, but knowing the credit score consequences helps homeowners weigh their options.

Four foreclosure options

  1. Foreclosure can cause you to lose as many as 140 points if you start out with a 780 FICO score. Your credit score could fall because of the unpaid mortgage payments that are reported to the credit bureau in the months before your home is actually foreclosed.
  2. A deed-in-lieu of foreclosure is when you voluntarily give your house back to the bank in exchange for cancellation of your mortgage loan. You’ll see your credit score drop about as much as if you’d gone through foreclosure. But, you may save some of the damage from late mortgage payments if you turn in your home sooner rather than later.
  3. In a short sale, the lender agrees to let a buyer purchase your home for less than your unpaid mortgage balance. A short sale will also affect your credit score similar to foreclosure. Again, you can lessen the damage on your credit score by short-selling your home before you’re ever late on a mortgage payment. That’s if your lender agrees to the short sale while your account is current.
  4. Loan modification will also impact your credit score similar to a foreclosure (100 to 150 points lost), even if your payments are current when you make the modification application.
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Default on a second mortgage

Defaulting on your second mortgage hurts your credit score, but it won’t hurt as much as a foreclosure on your primary mortgage.

Mortgage deferral

A yet-to-be-announced government mortgage deferral program may allow unemployed homeowners to reduce or even skip their mortgage payments for a period of time. If you’ve been approved for a deferral, your credit score won’t be affected by the missed payment.

Credit score consequences will vary

The higher your credit score, the more points you stand to lose from any type of foreclosure action. Homeowners with low credit scores will lose fewer points, but their credit scores may fall lower. For example, a homeowner with a 680 credit score might lose between 85 and 105 points after foreclosure, ending up with a 575 to 595 credit score.

How a foreclosure action affects you depends on how your lender reports it. A short sale might have a less significant impact if your lender only reports the unpaid mortgage balance as a default (versus the full mortgage amount).

Considering the credit score consequences of these foreclosure options are about the same, so you should use other criteria to help decide what to do about your home. There’s typically a waiting period to get a new home loan after foreclosure, so you may lean toward other options to relieve your mortgage obligation.

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