As we talk to more and more homeowners who are in distressed situations with their home loans, an issue that often comes up is the concern and worry that many have regarding their good credit rating. They have worked hard to attain it and don’t want to lose it. As a result they have struggled to continue their mortgage payments at all costs, draining their savings, going into higher and higher credit card debt, and some even tapping retirement accounts.
In these situations it is clear that the homeowner won’t be able to continue making the payments as they are currently structured given their present financial situation. Many folks initially feel that they want to try and keep the home if possible and do a loan modification. They think this would be best for their credit and are not excited about going through a short sale and a move. This may be the house they could live in for the rest of their lives, or they may think it will make a good rental down the road when they can move up into a bigger home.
Here are some important questions to ask yourself it you are a homeowner in this situation.
1. Is this the home you want to live in for the long run?
2.How far underwater are you with regard to loan balance vs current market value?
3.If you worked out a loan modification, how long would it take you to regain lost equity plus costs of sale? Figure 3-5% per yr appreciation depending on how conservative you want to be.
4. Are you aware that most lenders aren’t highly cooperative with attempts at loan modification or short sale unless you are delinquent on your loan by 2 months or more? Please don’t consider this advice to quit paying (we are not financial advisers), but only a statement of fact from our experience.
5.What is a conservative return you might get on some of that money if you were not paying it on your mortgage for a home that may be underwater for another 5-10 yrs with no real return.
6. Add up your mortgage, taxes, insurance, HOA dues plus a maintenance and vacancy factor (maybe 15-20% for a SFH – could be less or more on any given year) to see what rent payment you would need to cover these costs should you decide to modify your loan and eventually keep it and rent it. How much would the loan need to be modified to make it work? Even with the modification, are you prepared to deal with the potential periodic cash infusion that may be needed to keep it going if maintenance and/or vacancy increased?
7. If you did a short sale and could buy again in as little as two yrs for a lower price than you are paying on now, would that make sense, especially if any ding to your credit could be repaired by then?
Their are other questions, but these are some to get started with. Most homeowners for whom this may not be their long term dream home that we have worked with, after considering the important questions and much soul searching, come to the conclusion that they need to take advantage of the short sale process and move on. One day they will look back on it and see it as a bump in the road from which they did recover.
Typically we are told that a loan modification or short sale can affect your credit mild to moderately for 1-2 yrs, depending on where it was to start with. Some have indicated that that time may be reduced with some more aggressive repair strategies. In may cases a FICO score may drop as little as 50 points (compare this to a foreclosure where it may affected by as much as 300 points and stays on your credit history for 10 yrs).
Our advice is, therefore, not to be overly concerned about your credit rating. Ask yourself the right questions and consult with a real estate expert to help in your decision. If you are not in the Southern California area and don’t know a good agent, give us a call and we will refer you to an expert in your area.