The changing face of credit
It’s true that our national financial crisis has made obtaining credit a little more difficult, making a great credit rating more important than ever. However, in spite of or because of our housing crisis, defaulting on your home may not be the end of the credit road that it once was.
The magic credit score scale of 300 to 850 has been crucial in most American’s lives. The closer you can get to 850, the better your chances of getting a car loan, student loan, good insurance rates, mortgage loans and even jobs. This is still true if you need credit in the foreseeable future, but if you have time, a credit catastrophe may not be fatal.
Bankruptcy was always considered the pinnacle of credit problems. Generally, a bankruptcy filing has serious ramifications for your credit rating and typically stays on your credit file for 10 years.
However, after your bankruptcy is discharged, you will start getting credit card offers and other loan solicitations within a year. It may also be possible to get a government backed FHA mortgage while you’re still in bankruptcy with the understanding that you will repay some of your debt, can come up with a down payment and have made 12 on time payments to the bankruptcy trustee.
Even if you find yourself up against a bank foreclosure, your homeowner days may not be over although your credit score is taking a hit. A common misconception is that a short sale (in which you sell a home for less than the mortgage and the bank accepts the discounted price); or a deed in lieu of foreclosure (where you turn over your house keys and work with your bank instead of just walking away) is somehow better for your credit than a full-blown foreclosure.
According to Fair Isaac Corp. which creates FICO credit scores, all of these foreclosure options are treated equally negatively and are considered not paid-as-agreed accounts. However, when it comes to buying another home, a short sale or deed in lieu does give you the option to rebound faster and buy another home in the future more quickly.
Traditionally, a foreclosure sale locked you out of the housing market for about five years since lenders did not want to do a loan that was not eligible to be sold to Fannie Mae or Freddie Mac. But in late April, Fannie Mae announced it was relaxing its rules toward people who went through short sales or deeds in lieu of foreclosure. Starting in July these borrowers can be eligible for a government-insured loan in two years.
On another note, unfortunate homeowners who are trying to do the right thing and have applied for the government’s loan modification program are facing reductions in their credit scores by as much as 100 points. Even homeowners who are still paying their mortgage and other bills on time can get hit with lower credit scores by just applying for a modification. Apparently this signals a potential problem and is enough to drop the credit score.
In spite of everything stated above, your goal should be to keep your credit scores in tip-top shape. You never know when either a crisis or an opportunity will put you in a position of needing credit in a hurry. A bankruptcy or mortgage default may not be the end of the credit road, but it’s a road you should endeavor not to go down.