The Impact of Mortgage Default in a Credit Score

Credit scores really matter.

This is the reason why many homeowners who realize that they may lose their homes primarily worry about how it will impact their credit scores.

Homeowners can allow their homes to be foreclosed and their scores will be affected for 7 years. Another option is to have a deed as a foreclosure substitute wherein the home is given to the lender in exchange for the loan’s cancellation but this also results to a negative credit score.

Getting out of a mortgage through short selling the home is also a way to get rid of the house. In this option, the owner sells the house in a lesser price compared to the amount of his or her loan. This is also bad for the credit score.

A recent report from RealtyTrac Inc. showed that there is a 19% increase in the rate of preforeclosure transactions for quarter one and two of the present year. This rate oftentimes includes short sales. The data shows that short sales accounted for 12% of the total housing sales in quarter two. This is a rise from the 10% rate during the same time in the past year.

But is a there a specific order by which the ever-present system in credit scoring considers a short sale better than a foreclosure or a deed instead of foreclosure?

In case a person with a history of mortgage problem applies for a loan in the future, some lenders might look at a short sale as a better record compared to a foreclosure. However, the scoring system used in determining credit looks at the defaults as equally unpleasant.

Bradley Graham, FICO’s scores product management senior director, said that according to the examination of information that lenders communicate with credit bureaus about mortgage defaults, the weight of the different types of default are almost always equal in determining credit risk in the future.

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