What is the Credit Affect of a Foreclosure?

The answer to that question is …not good.  The credit affect to your FICO score can be severe depending on how well you strategically planned your default.  In short, a strategic  default is a planned course of action that has minimal effects upon a person’s credit profile and score allowing him/her to quickly recuperate from financial instability.

Most homeowners that either chose to relinquish their homes via a deed-in-lieu of foreclosure or participated in a short sale planned a strategic default; therefore, their credit profile and scores suffered minimally which allowed them to regain financial stability.

If you have had an excellent past credit history (750+ credit scores), then you may anticipate scores that will not greatly deviate from your present score.  However, this does not mean that you are automatically qualified to be approved for another mortgage loan.

The Transunion Report on Credit Affect

Transunion reports “Life after Foreclosure and Hidden Opportunities”  that mortgagors who strategically defaulted on their mortgage loans but paid all other debts on time were a “safe credit risk” compared to non-strategic defaulted mortgagors who had multiple debts.

Clearly, a strategic defaulted mortgagor would have more money available at the end of each month (because of non-payment of a monthly mortgage) causing less stress than one who is trying to pay all debts (including a mortgage) which causes more stress.

Conversely, after the foreclosure is complete the strategic defaulted mortgagor would have more stress due to the burdening pressures of a mortgage payment.

How Lenders View the Credit Affect

In spite of the “safe credit risk” results of the Transunion report, many lenders view the credit risk issue much differently.  Most lenders analyze mortgage accounts opened after completion of the foreclosure process as more likely to go delinquent than those opened early in the foreclosure process because it is believed that the excess liquidity justified the temporary good performance.

For this reason, conventional lenders are reluctant to make sound decisions about approving  a loan with a previous foreclosure that exemplifies high credit risk recognizing that these loans will be sold off as a mortgage backed security (MBS).

On the contrary, it is a known fact that there are some lenders that will make loans soon after a foreclosure.  Why?  Because many times this type of lender is known as a portfolio lender/private investor that will not sell the loan as a MBS.

Given this information it is necessary for any potential homeowner to be aware of the consequences of how a foreclosure can impair their credit to quickly obtain another mortgage loan.

In my opinion, this was an excellent survey and report given by Transunion that should have given insight to many lenders to review a strategic default mortgagor as a better credit risk for three (3) reasons:

1)      The previous credit history of most of the strategic defaulted mortgagors was excellent and should not be severely penalized for a “downturned economy ” that was beyond their control.

2)      Needless to say, a strategic defaulted mortgagor has planned and executed a course of action that exemplifies  a person that is responsible, conscientious and stable.

3)      If lenders relax the credit guidelines maybe we could get back to a buyer-friendly market.

What do you think?  Share your thoughts.




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