Late mortgage payments & your credit

How does being late on your mortgage affect your credit? The short answer: It depends.

When you hear about credit scores, what people are most often referring to is a FICO® score. Your FICO score is a way to summarize your credit risk at any given moment in time. The score takes into account your payment history, outstanding debt and length of credit history, among other things. Any potential lender will look at this score to determine how much of a risk you are and what interest rate you will be charged as a result of your risk level.

So, what happens to your credit score when you fall behind on your mortgage payment? That depends where you started. People with higher credit scores actually take more of a hit when they fall behind on their mortgage and when they go through foreclosure. For example, according to FICO:

Homeowner A

• Starting credit score: 680
• 90 days late: 610 (70 point drop)
• Foreclosure sale: 585 (95 point drop)

Homeowner B

• Starting credit score: 780
• 90 days late: 660 (120 point drop)
• Foreclosure sale: 630 (150 point drop)

While Homeowner B still comes out with a higher score after foreclosure, their drop in overall points is significantly greater than that of Homeowner A. This is likely because Homeowner A has some non-mortgage delinquencies or credit issues that have already lowered their score, so the effect of the mortgage delinquency isn’t as great. It also takes longer for a homeowner with a high credit score to recover their previous credit status after a delinquency or foreclosure.

When dealing with a mortgage delinquency, the options that allow you to keep your home typically have the least impact on your credit. Most loan modifications, including those offered through the federal government like Making Home Affordable, will not affect your credit score. Any negative credit impact comes from late payments that happened prior to the modification. A forbearance agreement or repayment plan can additionally tag on a negative impact to your credit score if your lender reports you as paying under a partial payment agreement.

Non-retention options such as short sale and foreclosure sale will have the biggest hit on your credit because of the level of delinquency and failure to pay on the loan as agreed. A common assumption is that a short sale is better for your credit than foreclosure. This may not actually be true.

Both will impact homeowners’ credit scores in a similar way because they typically involve significant delinquencies. Beyond that, it is difficult to say for certain how a short sale will impact your credit because there is no specific reporting code for short sales. This means that some of how your credit is affected is up to your lender’s discretion.

If you are behind on your mortgage and want to know more about your options, please call 206.694.6766 or email housingcounseling@solid-ground.org. There is no charge for Solid Ground services.

For more general information on this and related topics, attend our next free Mortgage Information & Enrollment Workshop on Wednesday, May 28th from 6-8pm at Solid Ground (1501 N 45th St, Seattle, WA 98103).

Homeowners Tip: Notice of Pre-Foreclosure Options

The Foreclosure Fairness Act went into effect in its current form in July 2012. The better-known component of this legislation is mediation, which can only be requested by an attorney or housing counselor and only after a homeowner receives a Notice of Default. The lesser-known part of the law is that homeowners have options before the Notice of Default and mediation.

If you miss payments on your mortgage, lenders can issue what is called a Notice of Pre-Foreclosure Options (NOPFO). When you are late on your mortgage payment, it can be easy to get overwhelmed with the letters and paperwork your lender sends. But if you don’t open and read everything, you may miss an important opportunity to work with your lender and buy yourself some time to avoid foreclosure. This notice can be easy to miss because you will actually not see these words on the first page. Instead the first page will say “Important Rights for Homeowners.”

The notice gives you the right to request a meeting with your lender – referred to as a “meet and confer” session – to discuss options to avoid foreclosure. Unlike mediation, a there is no neutral third party involved, and borrowers can request the meeting themselves. In addition to allowing for the meet and confer, this notice can also extend the foreclosure process by another 60 days.

Simply receiving the notice doesn’t guarantee you these rights. They are only available if you respond to the NOPFO within 30 days of the date listed on the notice. The notice will give you two ways to request the meeting, either in writing or by phone. We suggest that you respond in writing by certified mail so you have a record of it. Here’s some sample language you can use to write your own letter.

Your lender should contact you to schedule a meeting after they receive your response to the NOPFO. The best way to use this time is to submit your loan modification request beforehand so the lender has a chance to review it. This allows the meeting to focus on your specific situation, rather than just general options. Solid Ground’s housing counselors can help you prepare this packet for submission and represent you at the meet and confer session.

The meeting may result in a decision about eligibility for a loan modification or other options, or the lender may outline additional documents needed for review. If there is no agreement reached at this meeting, the lender can continue with the foreclosure process and issue a Notice of Default.

 If you have questions about this or any mortgage related issue, you can contact us at 206.694.6766 or by email at housingcounseling@solid-ground.org. Solid Ground is a HUD-approved housing counseling agency and provides mortgage counseling at no cost. Visit our Mortgage Services webpage for more information.