There Is Good News!

• Aging Out: In all instances above where I reference how many points will be lost in each scenario, it is important to understand that over time all derogatory accounts age out. This means that the older the account, the less it will hurt your credit scores.
• 7-Year Reporting Period: The law states that derogatory items “can be” reported for 7-10 years. It doesn’t state that they “MUST BE.” There is no need to wait out the 7 years. You don’t have to. You can start seeking early removal of the item by asking the credit bureaus that are reporting the information to send you a copy of the information they have on file to verify their reporting.  Law states that they MUST have absolute verification, or remove it from your report.
• You can start recovering and rebuilding immediately. You do not have to wait to start recovering and rebuilding.  Contact me for some great tips on how to get started now.

Which is The Best Choice to Protect Credit Scores?

Each of the scenarios presented in this report has a specific impact on credit scores, but it’s important that each individual understands that this is a very personal decision. A borrower must weigh the impact such a critical decision will have on family, employment, and future financial stability.

But above all, consumers should not be afraid to ask questions and find out what options are available. Many consumers mistakenly assume that there are specific laws and policies set in place that govern the actions of lenders, creditors, and credit bureaus. However, in many instances they are in the grey as much as the consumer. So homeowners in trouble should not feel intimated by them.

In Conclusion

My advice to any homeowner on the verge of foreclosure is, first and foremost, find out what options are available. Do the research. Consult the experts. Gather as much information as possible, and weigh the pros and cons. What may seem to be the best answer right now may also have a serious impact for many years to come, so make an educated decision.

The great news is that whatever fate falls upon your credit scores right now, you can start improving your situation immediately.

 

A source for additional information is Linda Ferrari's Book The Big Score Getting it and keeping It

 

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Bankruptcy Mortgage Relief

Currently, bankruptcy offers very limited protection to a homeowner who is upside down with his or her payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, as of now, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence.

How Long Before You Can Buy Another Home After Bankruptcy? 

The current guidelines from Fannie Mae & Freddie Mac state the waiting period for a Chapter 7 Bankruptcy is 4 years from either the dismissal or discharge date. The exception for extenuating circumstances is 2 years.

A distinction is made between Chapter 13 bankruptcies that were discharged and those that were dismissed. The waiting period for a Chapter 13 bankruptcy is:

• 2 years from the discharge date, or
• 4 years from the dismissal date.

There are no exceptions for extenuating circumstances.

In the case of multiple bankruptcies, the current guidelines state that the waiting period is 5 years from the most recent discharge or dismissal date. The exception for extenuating circumstances is 3 years from the most recent discharge or dismissal date.

WORD OF CAUTION:  If you are facing a foreclosure, short sale or bankruptcy due to circumstances of losing a job, a medical crisis, the sub prime mortgage crisis fallout, it is suggested that you fully document your experience – starting now. It’s not recommended to wait until later, because, if you decide to apply for a loan in two years based on an extenuating circumstance claim, the details and emotional energy of what you are going through will be more difficult to document and prove down the road.

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How Does A Loan Modification Affect the Borrower’s Credit?

Lenders use special codes to report consumer account information to the credit bureaus. When the loan modification program was announced, lenders used an existing code, called AC, to signal that their clients were participating in a loan modification program. The problem for those borrowers, was the fact that the AC code indicates that the consumer has only made a partial payment, or has entered into a settlement agreement, paying less than the amount due.  Why would lenders use this code? Because there is no code for a loan modification, and the AC code is the closest fit.

Here’s the good news, a new code was developed in November 2009.  It is called a CN code, and it will indicate a loan modified under a federal government plan — which should eventually have no impact on credit scores.

Here’s the temporary bad news — for the time being, the FICO scoring model does not consider the new CN code.  Before a change of this magnitude can be made to the FICO model, FICO must concludes that the code in a credit file is accurately predictive of the consumer’s behavior.  That means testing, case studies and research, which will hopefully be completed by year end.

Note:  The new CN code will not eliminate late pays that were made during the loan modification process.  So Borrowers who pay late will still see a significant drop to their credit scores.  And, regarding consumers who have already been reported under the AC code, at the moment, there is no retroactive guidelines, however, most experts believe that there will be soon. 

Bottom line, if you are a homeowner who is in the process of a loan modification now, or a homeowner who has already gone through the loan modification process, you should ask your lender to report the account under the CN code now, that way the new code takes affect, your scores should go up immediately.

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Loan Modification

A loan modification is when the lender agrees to modify a part or all of the terms of the original mortgage loan agreement.  This existing note is modified and remains in place.  Changes to the agreement can include: extending the term of the loan, changing the monthly payments, and changing the interest rate to make the loan more affordable and to help the homeowner avoid foreclosure or bankruptcy.

Loan modifications have become extremely common. So much so that a backlog of cases has forced lenders to prioritize their caseloads. This largely means that many homeowners are being forced into default to get their attention. This is unfortunate, because one 30-day late pay can cause a 50-80 point drop in credit scores.  The good news is that borrowers who choose this option vs. foreclosure or bankruptcy, show that they are exhausting every effort to pay the loan, and the effort will show in your credit scores and history.

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The Mortgage Forgiveness Debt Relief Act Of 2007

The Mortgage Forgiveness Debt Relief Act Of 2007

When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower; leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.

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How Long Before You Can Buy Another Home After A Short Sale?

The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Short Sale is 2 years from the date the Short Sale proceeding is completed There is no exception for extenuating circumstances.

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How Does Short Sale Affect the Borrower’s Credit?

The short sales that I have seen on credit reports have appeared as “Paid Settlements” on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I’ve seen several successful negotiations, so be sure to let your borrower know that it is possible.

A short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can’t afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn’t mean that they can’t afford a different loan program with a lower payment. There is no incentive for lenders to NOT negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it.

Here are the credit reporting options in preferred order:

• Paid As Agreed or Paid - Won’t hurt the score at all as long as the borrower has kept payments current.
• Unrated – May drop a few points.
• Paid Settlement – Credit scores will drop 50-150 points. 

If reported as a paid settlement, the item will remain on the credit report for 7½ years from the date of the first late pay that led to the paid settlement.

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