Is it Better for Your Credit Score to Foreclose Now or Wait it Out?
According to new numbers released by the Mortgage Bankers Association, 1 in 10 Americans with mortgages are facing foreclosure, begging the question of this struggling housing market: Will your credit score be harder hit by walking away from a home worth less than you owe or sticking it out to get back in the black? Liz Pullium Weston addresses just that in “Will housing or your credit heal first?”
When you allow your home to go into foreclosure, you can expect your FICO credit score to drop 140 to 160 points. Yet this is not simply symptomatic of the home default itself. The plunge is based on how those in foreclosure typically handle other debts in the months to follow. The majority of them default, implying that those who foreclose on a home are high credit risks for other loans in the future, thus the plunging credit score.
However, if you choose to be the exception rather than the rule, and make timely payments on all subsequent loans after your foreclosure, you can raise your credit score relatively quickly.
“How soon could your underwater house become worth more than you owe?” says Weston. ”No one knows, and recovery periods will vary widely by region. In some areas, home values are still falling. But in past regional real-estate recessions, the average recovery time was 6 years and 8 months.”
Considering that the longest a foreclosure can stay on your record is 7 years, and that you can start improving your credit score immediately after foreclosing, it does seem preferable and practical to walk away rather than stick it out just as long struggling to pay on a house worth less than you owe. Weigh all the factors carefully though, including Weston’s warning that a lender can actually file a deficiency judgement against you which stays on your record for 7 years after the suit is filed.
“If you live in a recourse state,” says Weston, ”where lenders can sue you for the difference between what you owe and what a home can bring in foreclosure, you need legal advice if you’re considering walking away. A bankruptcy filing can wipe out what you owe, but because of the serious consequences, trying to arrange a short sale often will be better than simply bailing on your loan.”
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