Effects Of Mortgage Debt On Credit Scores

Many people dealing with mortgage debt are desperately trying to avoid foreclosure. Knowing that losing a home in foreclosure can result in credit problems down the road, the consequences can be worse than some expect.

Credit Truths

The reason that a foreclosure can damage your credit is simple; you borrowed a large sum of money and defaulted on your payment. Unlike missing a payment on a credit card, a mortgage loan is worth far more money and is tied directly to the possession of the house. Further, missing a mortgage payment is often a sign of greater financial problems. When you allow the bank to foreclose on a home and take possession, you are stuck with the label that you are a risky borrower. Future creditors are hesitant to lend to someone who was unable to maintain a mortgage in the past, leading you to a longer road to credit recovery.

Luckily, there are solutions to help you avoid the, sometimes steep, consequences of a foreclosure. Short sales will result in you losing the home, but your chances of lessening the blow to your credit are much higher. For instance, many lenders will report a short sale as having the debt be “satisfied” or “paid” upon the sale of the home. Your credit is not nearly as impacted by a satisfied debt as one with a status of “defaulted”. However, there are occasions in which a lender will mark the status of your account as “settled” in a short sale. This can be more damaging to your credit than a “satisfied” status, but is still far better than the effects of a foreclosure. If you are pursuing a short sale, work towards negotiating a “satisfied” status on your account upon completion.