CREDIT has become the adult grade card. It opens and closes doors of opportunity and survival. For someone in a mortgage crisis it is more important to focus on closure in order to move forward. Once a house is foreclosed upon or sold in a short sale the healing process begins.
The majority of the damage comes from the number of days of delinquency someone experiences. FICO put out a good study to refer to: http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html
The chart in the link shows us a few things. First of all that a short sale with the debt forgiven is better than a short without the debt forgiven. Assuming the forgiven debt is reporting as a zero balance and not past due. A short sale without the debt forgiven is no better than a foreclosure in the chart. There is one thing where the chart falls short, it only shows 90 days of delinquency. Most homeowner’s would likely be at 180 days or more of delinquency before the foreclosure would actually take place. The credit score would likely be lower just based on the longer delinquency period being reported. The longer the delinquency the more damage to the score. No matter what, once the final event takes place, foreclosure or short sale, the recovery period begins. The derogatory information will remain for seven years. As each year passes it will have less and less adverse impact on the credit score. Generally the scores are back to the high 600 range to low 700 range in 2 – 3 years. However, every credit report is a like a stand of DNA. Recovery depends on the whole picture, not just one account. Never forget the importance of current active positive credit reporting onto the report. Make sure there is positive credit being reported.
The GOOD NEWS: nothing bad on the credit report will last forever. It may be necessary to look at bankruptcy as an option in order to weigh your options and guard against deficiency liability. While not favorable, it is an efficient means to cleaning up the problems of financial disarray in a very specific and legal manner. Without leaving the door open to future liability. When facing the prospect of losing your house always sit down with a bankruptcy attorney to find out your potential liability.
The other GOOD NEWS: a foreclosed homeowner today can be a home buyer again. Generally at the three year point for an FHA mortgage. In three years (FHA 4155 Guidelines as of 4.21.2010) no matter what the circumstances are right now YOU are eligible to buy again. That is 1,095 days, or only 26,280 hours (1/3 or more of which you will sleep through). Of course, at the three year mark you will have to qualify. There should not be any derogatory credit issues after the original foreclosure.
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About the Author: Patrick Ritchie loves teaching about credit; he is the author of The Credit Road Trip and The Credit Road Map series of books. Check out his free online classes at www.CreditLiteracyProject.com.
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