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Missed Mortgage Payments, Short Sales, Foreclosures and Modifications of Loans and Their Impact on Your Credit Report

The downturn of the economy has drastically affected the real estate market and the ability of homeowners to stay current with their mortgage payments. Many individuals have lost their jobs, resulting in many homeowners not being able to make their mortgage payments. Homeowners have attempted to modify their loans or sell their homes in a short sale (A short sale is when a homeowner is selling his home for less than what is owed on the mortgage). Others have lost their homes in foreclosure.

All of the options sought by the homeowners have involved having to skip mortgage payments. Skipping a mortgage payment is a sure way to ruin your credit because one missed mortgage payment carries more weight on your credit score than any other loan. Having good credit is important because lenders use credit scores to measure how you handle debt. The FICO score and VantageScore is what most lenders use to measure your credit because they are considered to be the most reliable sources for credit scores. The FICO score runs from 300 to 850 and the VantangeScore runs from 501 to 990.

Missed mortgage payments, serious loan delinquencies, loan modifications, short sales and foreclosures all negatively affect your credit. FICO and VantageScores have studied and quantified the impact of a missed mortgage payment for a borrower with good credit.

In their study, FICO noticed that for a borrower with a credit score of 780 who was 30 days late with his mortgage payment resulted in his credit score being reduced from 780 to 670-690.

A borrower with the same 780 score, who undergoes a short sale and the bank forgives the balance on the loan, had his credit score reduced to 655-675, and for the same person with the same credit score who loses his home in a foreclosure or undergoes a short sale where the lender does not forgive the balance owed and leaves a deficiency balance, his credit score goes down to 620-640.

According to the study conducted by VantageScore, a loan modification seems to have the least negative impact on a borrower's credit score. According to VantageScore, with a loan modification some borrowers' credit score may drop 10-15 points. Lately, there are some banks willing to work on a loan modification without waiting for the borrower to go delinquent on his loan. The government backed modification program, known as Home Affordable Modification Program (HAMP) is an option for some borrowers. HAMP has been created to assist borrowers who can show hardship, i.e. loss of job. However, HAMP has been criticized for not helping enough borrowers in need because of its stringent requirements.

Any homeowner having difficulties making their mortgage payment should seek legal counsel to discuss which if any of the options discussed above may be suitable for their needs. Please feel free to contact us.

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