If You Default on a Mortgage What Happens to Your Credit Score?
If you default on a mortgage, your credit score will be harmed. The severity of the impact to your credit score as a result of a defaulted mortgage varies by individual and depends on several factors such as whether you attempted to work with the lender to avoid defaulting on the mortgage, how long you were delinquent in making mortgage payments, the amount of your defaulted mortgage and the regulations in the state where your property is located.
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Time Frame
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Time frames play an important role in regards to defaulting on a mortgage and the impact to your credit score. According to "Mortgage News Daily", most mortgages have a 10- or 15-day grace period from the due date before the payment is actually recorded as late. On day 16, a late fee is assessed, but if payment is received, it is still not technically considered to be in danger of default. On Day 30, the borrower is considered to be in mortgage default, and his credit score is impacted.
Types
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The most common types of defaulted mortgages are short sale and foreclosure. However, according to Creditcard.com, the type of defaulted mortgage is not actually what impacts your credit score, but rather, the number of missed mortgage payments before you formally default. In the case of a short sale, the owner works with the lender to resolve the issue by asking forgiveness of part of the debt. The bank will still take a loss on the property, but will not be left holding the entire vacated property. As a result, they will look upon the defaulted mortgage more favorably, but the process can be lengthy to negotiate. By the time lender responds, you will have missed payments, which will impact your credit score. If you default on a mortgage entirely, your credit score will be hit more severely ,as you will have both missed payments and made no attempt to reach a solution with your lender.
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Significance
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According to Creditcard.com, you can expect a defaulted mortgage to impact your credit score from anywhere between 150 to 250 points, depending on the type of mortgage you have, your specific financial situation and the state in which the property is located.
Considerations
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When defaulting on a mortgage, your credit score is not the only financial matter to consider. While the Mortgage Forgiveness Act of 2007 protects many, there are exceptions depending on your specific mortgage and property. If you are not covered under the act, you can be required to pay the taxes on the difference of the defaulted mortgage. In some instances, the financial burden of the taxes may result in bankruptcy filing, which will also impact the credit score.
Expert Insight
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According to Mortgage News Daily, there are benefits to attempting to reach a solution with your lender before defaulting on a mortgage. Despite your having a black mark on your credit score, many lenders are willing to consider a new mortgage loan in about three years, if the borrower acted in good faith to resolve the defaulted mortgage.
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References
- Creditcards.com: How foreclosures, short sales, other mortgage defaults affect credit
- Internal Revenue Service: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- Mortgage News Daily: Foreclosure Happens, But There Are Solutions
- Mortgage News Daily: Fannie Mae Fights Back Against Strategic Defaulters
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