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Just in from CNNMoney; Trial Loan Modifications DO Hurt Borrowers’ Credit

Only weeks ago, I published a post with updated information from an advanced education class I was taking though the CRS (Certified Residential Specialist) program for Realtors, that was discussing different types of distressed sales and loan modifications to your mortgage, and how they would impact your credit score. In that class, we learned that borrowers were being told that taking advantage of the government HAMP (Making Home Affordable) program should not negatively effect their credit score, and that we should encourage borrowers to strongly consider this option before looking down the road of a short sale or foreclosure. … For those who are behind on mortgage payments and who take the new mortgage arrangement, it is reasonable to expect that their credit would have already been damaged to some extent, just from the mortgage payments that had been missed. However, many other people have been encouraged to look at the HAMP program to re-arrange their mortgage and reduce their payments, even before they are behind on a payment. It is these people who have been squeaking by, trying to make ends meet and who have been making payments, who were being told (even by mortgage officers themselves) that their credit would not be effected.

What is a strategic default?

A strategic default is the decision by a borrower to stop making payments on a home mortgage despite having the financial ability to make the payments. Usually this occurs after a substantial drop in the house’s price such that the debt owed is considerably greater than the value of the property, and is expected to remain so for the foreseeable future.

… As discussed in CRS Course-111 on Short Sales and foreclosures, a strategic default will likely effect your credit score negatively by 140-150 points and will also result in 5-7 negative marks on your credit. This is likely going to be more detrimental than going through the process of a short sale or a loan modification, but is said to not effect your credit score as negatively as filing for bankruptcy. … Before making any decision to pursue a short sale, a foreclosure, a strategic default, or to file for bankruptcy, it is in your best interest to consult with a licensed Realtor, your tax accountant, and an attorney.

Answer these questions to determine if purchasing a bank owned home/foreclosure is right for you…

All during the time that we are awaiting closing, mortgage rates will be fluctuating, and if the loan lock deadline passes, you will have to re-apply for the loan and incur any related charges. … It is very unlikely that we will be allowed to occupy the property prior to closing, so you would need to have a backup residence in mind, in case of any delays. If this is your primary home, some sort of temporary living arrangement would need to be made, and it may include moving twice- from your current home to the temporary residence, and the temporary residence to your new home. … Some of the changes that are often arranged in the addenda; tougher restrictions on the Purchaser, shorter timelines for the Purchaser to secure a loan, conduct a home inspection, etc, a larger deposit, deposits to be held in the escrow of the lenders choice, and very few provisions that will allow for the Purchaser to get out of the contract and many ways for the lender/seller to walk. … You will also want to make sure that any liens that may have been held against the previous owners (who may have had difficulty paying many bills, aside from their mortgage) have been released and you will have the ability to purchase the home free and clear of liens and encumbrances.

How Much Will A Short Sale/Foreclosure Hurt My Credit?

I have had a couple of people over the past few months mention that they may consider a short sale, so that they can just get out from under their homes and move on. While the ramifications of a short sale or foreclosure seem to be getting slightly more lenient in light of all of the predatory lending that has occurred in the past several years, they are still significant. Here are some general credit score ranges (as provided by the National Association of Realtors CRS Course 111 ); 990: highest calculable credit score. 900: 15% of borrowers have a credit score at 990 or above. 740: a rough number around which people are usually able to get a good, competitive loan. 680: the average credit score. 501: lowest calculable score. 500: 18% of people have a credit score of 500 or below. Let’s imagine that you have a credit score of 740 and own your home, but are having trouble making your payments (which may actually be causing your credit score to drop in the meantime). … Before making any decision to pursue a short sale, a foreclosure, a strategic default, or to file for bankruptcy, it is in your best interest to consult with a licensed Realtor, your tax accountant, and an attorney.