Jul
07
2010

Impact of allowing mortgage to go delinquent to qualify for short sale

Dear Experian,

I had excellent credit before we were advised by our lawyer to not pay our mortgage so we could qualify for short sale of our home. One year later, our home is now sold. How can we go about fixing our credit now? All of our other credit history is excellent.

- DNM

 

Dear DNM,

Based on the advice you received, you voluntarily allowed your mortgage payments to become very delinquent. Your lender may have required that the mortgage be delinquent in order to negotiate a “short sale” arrangement. However, by choosing not to pay the mortgage, you likely did serious damage to your credit history. There is no quick way to recover from that damage.

The term “short sale” is used to describe an agreement between you and your lender to sell the house for less than is owed on the mortgage. The term does not appear in a credit report.

Instead, the mortgage account may be reported as “settled,” or “settled for less than originally agreed.” It also will show the history of missed payments. Any account not shown as paid in full as originally agreed is considered negative. A mortgage debt not paid in full can have a substantial negative impact on credit scores.

Time is the key for rehabilitating your credit history. Make sure all of your other debt payments are always made on time, and reduce any debts you have as much as possible. Continue to use your credit cards, keeping your balances low and paying in full each month. That positive, current activity will help to somewhat offset the negative history for your mortgage.

However, the mortgage history won’t go away. The late mortgage payments will remain for seven years from the date they first became late. The further in the past the late payments occurred, the less impact they will have on credit scores. As the delinquencies become further in the past, your credit scores should improve, assuming you have kept all of your other payments current.

Thanks for asking.

- The “Ask Experian” team

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