How Much Damage does a Mortgage default Do to Your Credit rating?

Does it keep you from getting another mortgage down the road? Does anyone know about a stop loss agreement with the mortgage company to eat some costs so you can sell your house?

How Much Damage does a Mortgage default Do to Your Credit rating?
A foreclosure or defaulting on the mortgage will stay on your credit report for seven years. It's only slightly better than a bankruptcy (since every credit application you fill out always asks if you've declared bankruptcy). There are "stop loss" measures like short sales, deed-in-lieu, etc. but they all MUST be approved by the lender first. In a short sale, the bank is agreeing to take LESS than the loan amount so you can sell the place at a lower price (and thereby quicker). This has tax implications since the IRS may tax you on the "forgiven" amount. For a "deed-in-lieu", you are basically handing over the deed to the home in lieu of foreclosure. Again, the bank MUST agree to this and you will be kissing any equity on the home goodbye. Either case, you have to leave the home. There are other options your lender can help with so contact them ASAP. Simply letting the place foreclose is, quite possibly, the worst option.
Reply:It's second only to a bankruptcy, if that tells you anything.





PMI is for the LENDER, NOT you.





PS: Most lenders require a 3 to 5 year seasoning after a foreclosure...Fannie Mae and Freddie Mac requires 5 years.





I have NEVER heard of anything but a fly-by-night subprime lender doing a loan 2 years out of a foreclosure and usually at double-digit interest rates.
Reply:Depends where you live, but usually your Credit rating is affected negatively for 7 years. You may be able to get small amounts of credit with collateral after 2 or 3 years. Don't expect to be able to get another mortgage for a very long time, and then if you do, you will need a BIG down payment, probably a co-signor and you will pay higher interest as well as very expensive mortgage insurance on the loan.
Reply:A mortgage default will pummel your credit rating, and you will not be able to get another mortgage for at least 2 years.





There are lenders that allow a short sale, which means they will accept less than what you owe.
Reply:If you are talking about letting the house go into foreclosure then yes, your credit will take a beating. The person who said it is second only to bankruptcy is correct. It will be at least 5 years, most likely 7, before a bank will consider lending to you again. They were correct in stating that you will pay a higher interest rate if the bank does decide to lend to you. This higher interest rate will be because you are a greater risk. You have already proved that you will let a mortgage fall through.





The question about the taxes is a bit off. First, PMI covers the lender, not you. It has nothing to do with you at all so anything paid between the PMI company and the lender has no bearing on you or what you owe.





The main thing to look at here is if you are in a state that allows deficiency judgments. Some states don't allow them, some do. What a deficiency judgment basically is is if the bank can come after you for the difference between the amount you owe them and what they sell the house for. This amount can be forgiven by the bank, if it is you will get a 1099 for the amount but you do not owe taxes on it.





Two key things here are 1, the cost of a foreclosure usually adds about $40,000 to the amount of money you owe the lender. This is for the attorney fees, late fees, court costs, etc that the lender incurs in the foreclosure process. So if you think you owe them $100,000 you really will end up owing them $140,000. If they then sell the house for $75,000 you will end up owing them $65,000. If they choose to forgive this debt (again, totally up to the lender if they want to do this, they have no obligation) then you will receive the 1099 for $65,000 just to report on your taxes. If they don't forgive the debt then you still owe this money and they will come after you for it, turn it over to a debt collector, etc and it will haunt your credit report for many years to come.





If you are in a state that does not allow deficiency judgments then you will just get the 1099, again, just to report on your income taxes (no tax due).





Best bet is a short sale or deed-in-lieu. Foreclosure should be the absolute last resort.





Good Luck!

ginkgo