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Short sales, your credit & whether you should keep paying your mortgage payments

People ask me all the time, “Should I keeping paying my mortgage payments if I am about to do a loan modification or a short sale?”

My answer to them is, “get the facts and trust your instincts.”

Here are the facts:

Effects of Short Sale on your Credit Report:

  • 85-160 point reduction on your FICO score, depending on the borrower.
  • Inability to obtain a mortgage for at least 24 months.

Effects of late payments on Credit Report:

  • 30-60 day late payments, if considered an “isolated occurence” (you do not have 30-60 day late payments on multiple accounts), does not cause long term damage to your credit.
  • 90-120+ day late payments, however, do drop your credit score for the long haul (around 7 years).

Effects of Collections (post Short Sale Deficiencies) & Debt Settlement

  • Your score from suffer with both, except with debt settlement, you’ll eventually repay your debt and thus helping to rebuild your credit score
  • Do not simply leave your debt hanging with collections in hopes that they will charge off the loan.  They will continue to report that you are in default of “installment payments,” etc.  They can do this for years.  It is better to settle your debt and move on.  You especially do not want additional 90 day late payments reported as your credit score at that point will drop significantly.

Here is my opinion:

Many homeowners end up spending all of their savings and living expenses on their mortgage payments, in the name of “protecting their credit.”  Some are even borrowing money (using lines of credit) to pay back their mortgage. Little do they know that they are probably not accomplishing what they think they are accomplishing by paying their payments.  Moreover, mortgages are not designed to replace your groceries or gas in your vehicle, and if that is the case, the homeowner either needs to get their loan modified or simply let go of the property (given their situation isn’t a consequence of some unnecessarily large personal expenses, ie. gambling).  The mortgage is not right for them.

Homeowners must ask themselves, then, is it really worth paying their mortgage if you are already 90+ days late to preserve their credit?  How about if you are current, based on the facts, do you have some wiggle room to reserve money to pay down other expenses? Aren’t you simply paying your banks rent money until you close your short sale?  Are you supposed to be neglecting your daily necessities just to pay your mortgage?  As far as loan modifications, did you know that late payments can be wrapped around the mortgage balance once you start your new payment plan?

Ask yourself, what could you do with a couple months worth of mortgage payments?

I’ve got some answers.

1.  Pay off your loan mod fees (although our short sale negotiators are paid by the lender, unfortunately loan modifications do not work that way)

2.  Reserve money to pay your debt negotiation specialist who can help negotiate your post short sale deficiencies (becoming much more common), consolidate all of your other unsecured debts (credit cards, medical bill, small loans etc) and repair your credit

3.  Spend it on daily necessities.  Do not sacrifice meals to pay your mortgage because that mortgage (as is) is not right for you.

Is it smart to spend money on money that has clearly no return on investment?

Is it smart to save money in order to save more money in the long run?

Should you keep paying your mortgage payments?

The answer:  Get the facts and trust your instincts.

Written by SSB

13 Comments

  • Kevin,

    My first mortgage will be getting their full amount owed less about $1,900.00 is it worth it to try and pay this in full now somehow or make payment arrangements. They are not asking for it but they will report to the credit bureaus “agreed settlement short of full payment” if there is any balance remaining. Will it effect our credit very strongly if we leave “as is” or should we contact to make payment arrangements prior to closing? The house should close by October 30. Meantime the second will have that deficiency balance of about 120K so that will be a big negative. Plus both accounts are delinquent for August, September and October payments. Everything else we are current on…it’s just the house issue. Does the first mortgage reporting matter that much? We won’t be looking to buy a house for at least 3 years anyhow, but I might be needing school loans soon.

    Reply
  • You’ve been in default for 3 months, which technically means that you may already have a 90 day late payment on your credit report. At this point, whether you pay them or not may not have much bearing on your credit score. However, since there are “grace periods,” this may not be the case (you will want to verify with your lender).

    By payment arrangements, you may be referring to a “forbearance” plan. You may want to ask your lender whether they have reported the 90 day default to the credit bureau. If they have not but are on the verge of doing so, it may be in your interest to work with them a bit (since you going to be applying for school loans very soon). If they are not even close, then ask yourself, is there any benefit of paying your lender any more money to preserve your credit when you are already undergoing a short sale?

    Reply
  • Armando Perez on

    Kevin, I am a realtor in West Covina , Ca and am seeking a short sale nogotiator to process and mitigate my Short Sale listings.

    Please provide a referral contact name and number.

    Thanks

    Armando Perez
    Global Realty
    626.840.7632

    Reply
  • We are in the process of doing a short sale on our house in WA. We recently recieved a cash gift and are wanting to pay off some credit card debt. Will paying off the debt affect the short sale? Thanks for your time.

    Reply
  • Jenny,

    I think you are making the right decision by paying off credit card debt. If you cash in your savings, the lenders generally will want it

    Reply
  • Hi Kevin,

    My husband and I relocated to another state after my husband’s military contract expired in 2008 and I had a job transfer as well. We tried to sell our house in WA state but have been unable to do so. Finally we rented the house, but the rent only covers about half the mortgage, we have basically been struggling for 2 years. Recently we lost our renters and agreed to a 2 month forbearance with a loan modification application in process. Our credit score has dropped about 100 points due the the lender reporting us 30 – 60 days past due even though we are on a forbearance (and before this had perfect payment history for 3+ years), can they do this? We thought they weren’t supposed to report us as delinquent while in approved forbearance and worse yet a credit score drop of 100 points. Is it worth even trying to make a payment plan and continue to try to pursue a loan modification, it seems that we get penalized either way.

    Thank You!!

    Reply
    • 30-60-90 day late payments CAN be reported to the bureaus, but there are ways to remove them:

      Visit this section and follow the link: http://seattleshortsaleblog.com/credit-deletion/

      As far as whether you should continue to pursue a loan modification or sell, it depends on whether your property is worth holding on to

      Will you be able to break even on your rental after modifying your mortgage or will you still be losing money?

      Will the property be worth significantly more than what you purchased for 3-4 years later?

      Reply
  • My ex husband and I were seperated over a year ago and we divorced approx 8 months ago. he has been living in the house. He has not paid the mortgage in 8 months. He has also not paid the 2nd mortgage in 8 months. Do they keep dinging our credit every month after the 90 days?

    Reply
  • My ex lost his job….found another several month later making less than half of his wages. His current job is not steady income. We HAD to divorce or separate for my own protection for so we could not live in the same house and this happened over night. The house had been on the the market for some time and it was no longer worth what we had paid for it. we could see the house short selling and was struggling with keeping the lights on for him and my son…..credit cards went late and so on and so forth. He stopped paying the mortgage and I pay rent my daughter and I.

    Reply
  • I was told we have two things that help us with foregivness….divorce and loss of a job…..is that true.

    Reply
  • If the mortgage cnmapoy has 3 credit scores, they use the middle. If the mortgage cnmapoy has 2 credit scores, they use the lower. They don’t average the scores. This is based on the underwriting policies of my clients. Other mortgage companies might have different policies (but I doubt it). They will most likely use the lower of your husband’s scores (540) so the changes are pretty slim. A low score may be mitigated with a higher interest rate or a greater downpayment. Good luck!

    Reply

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