Late mortgage payments & your credit

Foreclosure signHow 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).

Short Sale & Deficiency Judgments in Washington State

Short sale is a good option to avoid foreclosure, however if you don’t know what you are getting into, you may end up owing a deficiency judgment unless it is otherwise stipulated in the short sale agreement.

What is short sale: A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the “deficiency.”

HousesWhat is a deficiency judgment: A deficiency judgment is simply the difference between what the lender is owed and what they are paid back. When a lender is not paid back in full via a short sale, they can go to court and get a court order directing the borrower to pay them back the difference. The lender can then take that judgment and attach it to the borrower’s other properties, if they have any, or garnish the wages of the borrower.

In the State of Washington deficiency judgments are not permitted on non-judicial foreclosure processes, however, if there is no “power of sale” clause present in the original loan documents, the lender can pursue judicial foreclosure. The lender would have to sue the borrower to start a judicial foreclosure and a deficiency judgment can be awarded to the lender if the property is found by the court to have been abandoned for at least six months before the decree of foreclosure. If the “power of sale” clause is present in the original loan documents, the lender can pursue non-judicial foreclosure. This clause authorizes the lender to sell the property in the event the borrower goes into default on the loan.

The non-judicial foreclosure process in Washington State does not allow for the lender to sue the borrower to obtain a deficiency judgment. In real life it’s rare for the lender to foreclose judicially because Washington is a redemption state. Also, if the homeowner doesn’t have equity in the property, and they do not have other assets the lender can go after, they usually don’t attempt to obtain a deficiency judgment. It’s not to say they won’t try, but it is usually to their advantage to just get the house sold with a short sale and write the loss off and move on.

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