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Foreclosure Articles
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From Bad to Worst

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Posted On: 06/02/2010

QUESTION:

Which is worse in terms of effect on a credit score – foreclosure, short sale or a deed in lieu of foreclosure?

ANSWER:

By the time someone faces a foreclosure, or an alternative, the odds are overwhelming that they’ve already missed a variety of bills and payments. In such circumstances credit scores have already been reduced and will stay reduced for some time.

With a foreclosure the owner loses the property for nonpayment of the mortgage, and today that will likely mean a loss for either the lender, the loan insurer or both. With a short sale, the lender agrees to allow the sale of the property for less than the remaining loan balance. There’s no “foreclosure” in the sense of a formal event, but the loan is not being fully repaid, so, again, the lender, the loan insurer or both can face a loss. In the case of a deed-in-lieu of foreclosure, the homeowner gives the keys back to the lender, and there’s no formal foreclosure, but once more the lender and the mortgage insurer can face losses. In all cases the borrower has not met the contractual terms of the loan agreement.

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In each case foreclosures, short sales and deeds-in-lieu of foreclosure are likely to be recorded as “not paid as agreed” on credit reports, according to MyFico.com, a site operated by the Fair Isaac Corp., the major developer of credit scoring systems. In essence, the impact on credit scores is likely to be the same regardless of which option homeowners elect.

Lenders may treat foreclosures, short sales and deeds in lieu of foreclosure differently when it comes to considering a mortgage in the future, especially if the homeowner had strong credit before the loss of the home and financial problems arose for reasons beyond the owner’s control – think of an accident, illness, divorce or job loss. For specifics, speak with local loan officers and real estate brokers.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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