Selling Your House to Preserve Your Credit
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"I want to stay where I am, but I am concerned that if I lose my home I am not going to be able to find any affordable housing to rent, and even if I do, no one would want to rent to me because my credit will be so poor," says Susan Mundahl, who, since being laid off in March 2008 from an executive assistant position with the non-profit Hadassah organization, has been unable to find full-time work. Her husband, who recently completed a degree in graphic design, is doing small contract jobs while looking for full-time work.
With a national unemployment rate of 9.5 percent as of July 2010, many homeowners are finding themselves in the same boat of watching their creditworthiness fall as their incomes fall, especially if they are behind in their mortgage payments as they scramble to make ends meet with little to no income.
If this sounds like you or someone you know, there are several things you should know about how this affects your credit.
After 30 days of delinquency a lender will report the late payment to the credit bureaus. As a result, your three-digit credit score with Equifax, Experian or TransUnion, wlll drop a few points, and continue dropping with each missed payment.
After 90 days of delinquency, the lender might send you a letter saying that the foreclosure process will start unless you make good on the missing payments. At this time or soon thereafter they will file a "notice of default" with a local courthouse. This will also negatively impact your credit, as it is reported to the credit bureaus and can affect your chances of refinancing the loan. But you are only in a good position to refinance if your monthly loan amount is 30 percent or less than your monthly income.
As a couple, the Mundahl's receive about $2,400 a month in unemployment benefits, which means more than 50 percent of their income is going toward their $1,290 mortgage and property taxes -- when they pay it. With fees and penalties, they are now behind $4,100 on their remaining mortgage balance of $115,826.
Unless their mortgage payments are brought current by Sept. 7, 2010, according to an August 8 letter they received from Wells Fargo, they could be heading into foreclosure with their entire mortgage note due immediately. A foreclosure would further damage their credit and ability to purchase another home immediately, says Jay Dacey, a Plymouth, Minn-based mortgage specialist, who adds, however, that it can take a bank close to 12 months to finalize foreclosure proceedings. But if they do, a delinquent homeowner's credit would take a hit so severe that they will not be able to purchase again for three years.
"The FHA (Federal Housing Administration) allows a homeowner to purchase a new home immediately after a short sale under certain conditions," says Dacey. "They must have a legitimate reason for the move, cannot be taking advantage of the market, and cannot be late on their existing mortgage."
Here are their options:
Sell the House. The Mundahls, are considering salvaging their credit as well as equity in their house, which has a county assessment of $178,000, by putting the home on the market at a discount, hoping to sell it for about $150,000. They would then move temporarily into a rental while they find jobs and rebuild their credit.
This would be a better plan, says Dacey, than going into foreclosure. But to further protect their credit, he says the Mundahl's should also get caught up on their back payments. "Three or four months of delinquency is not as bad on your credit as 7 or 8 months."
Loan Modification. Homeowners scrambling to keep up with payments could also pursue a loan modification with their existing lender, but that also will damage their credit, says personal finance expert Lynnette Khalfani-Cox, author of Perfect Credit: 7 Steps to a Great Credit Rating. That's because when a loan mod is reported to the credit bureaus it is the same as saying you're not paying as originally agreed, resulting in a status change to your credit profile.
Susan Mundahl says her family is on their second attempt with Wells Fargo to try to get a home loan modification to reduce their payments or at least drop their current 7 percent interest rate to something that will bring their payments down to 25 percent or less of their income.
"When we applied before, in November 2009, Wells Fargo didn't lower our mortgage payment, although on the phone they promised they would," she says. Instead of a loan mod, they received a HUD loan.
HUD Loans. Homeowners with an FHA-insured mortgage may qualify for an interest-free loan to bring the mortgage current. The money gets paid back after you pay off the mortgage or sell the house. This solution, which the Mundahls received in Fall 2009, can help avoid serious credit score damage.
"We were given a HUD loan around $5,000 that was added to on to the back of our Wells Fargo loan," says Mundahl. "I thought Wells Fargo was also going to cut our interest rate also, but they didn't. I am starting not to have high hopes that they will get us into the loan modification program now."
Mundahl, who says they were turned down in the spring for a home equity line of credit due to a poor credit score, says her greatest concern: "Now my credit is ruined, and somehow I'm supposed to convince a prospective landlord to trust me to pay rent. I'd rather have Wells Fargo help us with a loan modification than to sell my home, but we'll do what we need to do."
A Wells Fargo mortgage representative was contacted for this story, but had not responded by time we published.