Anthony J. VignierI am often asked by my clients who are facing foreclosure how credit score is affected by foreclosure and if a short sale, deed-in-lieu of foreclosure or filing bankruptcy is a better option with regard to the effect on their credit score. First one must keep in mind that there are other issues to consider in addition to how the foreclosure will affect your credit score such as tax consequences from the foreclosure and other factors outside of your credit score that lenders will look at in order to provide you with loans and financing in the future.


From a practical standpoint, the effect on your credit score resulting from a short sale, foreclosure or bankruptcy, are ultimately very similar. According to Fair Isaac (also known as FICO), your credit score when facing a short sale, foreclosure or deed-in-lieu of foreclosure will drop anywhere from 85 to 160 points. Should you file bankruptcy, your credit score will drop anywhere from 130 to 240 points. If one were just to make a decision based upon the drop in one’s credit score, you would reach the conclusion that a foreclosure is better than a bankruptcy. However, when one considers other factors such a conclusion is wrong.

Credit Score is Affected by Foreclosure
There are two main reasons why a bankruptcy can be preferable to allowing a home to go to foreclosure. First, when a property goes to foreclosure, the debtor still faces the possibility of the lender pursuing the debtor for a deficiency, which is the difference between the fair market value at the time the property is sold at public sale, and what is owed on the mortgage. For example, if the debt is $200,000 on a mortgage and the property is only worth $150,000, the borrower will face a $50,000 deficiency judgment (not including attorney fees, court costs and interest). The bank can then hold this Judgment for 20 years or start collection proceedings against the debtor which may include a wage garnishment. Banks are now more actively pursuing these deficiencies. However, if the debtor were to file for bankruptcy, this $50,000 would be discharged or wiped out and the lender could not go after the borrower for any money. In addition, there is no tax consequence for the forgiveness of this debt through bankruptcy.

A second reason why bankruptcy or a short sale is better than allowing a foreclosure to proceed to judgment and sale, is that the debtor will be able to more quickly qualify for a mortgage in the future. This is because while each bank has its own guidelines, most banks generally follow the guidelines set forth by Fannie Mae and Freddy Mac. The guidelines are very lengthy, but they can be summarized as follows:

1. Under the guidelines, your best option for purposes of obtaining a new loan in the future is to either do a deed-in-lieu of foreclosure (where you transfer the property back to the lender in exchange for a release of any deficiency) or a short sale, where you sell the property for less than what is owed on the mortgage. Under the guidelines, if you have a 20% down payment, you should be able to qualify for a loan 2 years after a transfer by a deed in lieu or short sale. If you are only putting down 10%, you would qualify for a loan after 4 years.

2. Should you file bankruptcy, under the guidelines, you would qualify for a mortgage after 4 years from the date of Discharge. In a Chapter 7, the discharge occurs approximately 6 months after you file and in a Chapter 13, the discharge can come between 36 and 60 months after you file.

3. The worst option is foreclosure under the guidelines. You would have to wait 7 years from the date the foreclosure judgment was entered before you qualify for a loan under the guidelines. Additionally, if a deficiency judgment was entered against you during that time, the deficiency judgment would also have to be paid off prior to you being able to close. Obviously for these reasons, the worst case scenario should you wish to get a fresh start is a foreclosure.

In Conclusion, although from a pure credit score, a bankruptcy may cause a larger initial drop in your score than a foreclosure, in the long run, the Discharge provided by bankruptcy, especially a Chapter 7, may be a quicker and more efficient way to get a fresh start and have the opportunity buy a new home in the future. Keep in mind that the foregoing is just meant as a general discussion of these issues and each person’s situation is different. That is why it is important to always consult with qualified professionals regarding your specific situation.

Also depending on circumstances, some people may qualify sooner for credit or mortgage under the above scenarios while others may take longer. If you, a client, friend or family member are facing foreclosure or other financial issues, please contact me for a free consultation so that I can analyze your position and point you in the right direction.


Anthony J. Vignier is an experienced bankruptcy lawyer who gets results for his clients. He can give you guidance for a better financial future. Anthony has over 21 years of legal experience. He is the attorney you want on your side. Anthony considers the situation of all his prospective clients by meeting with them and going over their unique circumstances. After a Bankruptcy is successfully concluded the client receives a Discharge Order that legally removes the obligation to pay back any Debt that was discharged through bankruptcy. Anthony’s clients are able to start fresh after receiving their Discharge. Anthony’s can be reached at (800) 707-5252. His Office is located at 115 Kearny Avenue, Kearny, New Jersey.


Continue Reading

HAMP Tier II Loan Modification

Anthony J. VignierA few weeks back I wrote about the Home Affordable Modification Program, “H.A.M.P.”, which can help a homeowner modify their mortgage to an amount that that can be managed through interest rate and principal modification. But what happens if a homeowner does not qualify for the program or has a rental property? In that case, the new HAMP Tier II modification program may give homeowners new options that can help.

To be eligible for a HAMP Tier II modification, you must be a borrower who is not eligible for a regular loan modification, who failed a loan modification, or who applied for and was rejected for a loan modification. If a homeowner failed a permanent loan modification, twelve months must have passed from the effective date of the original permanent modification or the homeowner must have had a change in circumstances.

In addition, owners of rental property can apply for a HAMP Tier II modification for mortgages on their rental property, provided all of the following apply:

  • You own fewer than six single-family rental units;
  • You are in actual default on the rental mortgage;
  • The net rental income on the property is less than the total mortgage payment on the rental property or the owners can document actual hardship;
  • You intend to rent the property out (or have a family member occupy it rent free) for the next five years.

As a homeowner you must be careful about entering into Tier II modification, however, because once you accept the Tier II modification, you are no longer eligible for a HAMP Tier I modification which is the regular loan modification. As a result, homeowners should be extremely careful to make sure they consider and evaluate their eligibility for a HAMP Tier I modification because it generally gives borrowers better affordability protections. Also, if a homeowner defaults on a HAMP Tier II modification, they are not eligible for any HAMP modification.

The new HAMP Tier II loan modification is available on June 1, 2012. Applications must be submitted no later than December 31, 2013, with the permanent modification started no later than September 30, 2014. Be aware that the banks and mortgage companies do not have to tell you about this program so it is up to you, the borrower, to request the application.


Anthony J. Vignier, JD, CFP is an attorney and Certified Financial Planner in Kearny, New Jersey. He helps his clients with legal matters, asset and income protection strategies as well as investment guidance. Please call Anthony at (800) 707-5252 or send him a message through our contact form.


Continue Reading

Mortgage Loan Modification

Anthony J. VignierIf you are an anxious homeowner, worried about making mortgage payments or you are missing mortgage payments there are solutions available. The Home Affordable Modification Program, “H.A.M.P.” can help you change your loan to an amount that you can manage. A mortgage loan modification can mean the difference between keeping or losing your home. Through this program, it is possible to reduce your monthly payments by reducing the interest rate and making the mortgage current by adding any amount that is overdue to the end of the loan.

HAMP is part of a federal law created to assist homeowners modify their mortgages to prevent foreclosures and the loss of their home from foreclosure. A borrower must be either already delinquent in payments or a borrower may be current, but likely to miss a payment soon due to financial hardship. The guidelines call this “imminent risk” of default. Late payments are not a condition to begin the mortgage loan modification process. Also, the mortgage must have closed before the end of 2008, must be senior to any other loans, must be within a specific loan amount, be a one to four family home and must be occupied as the borrower’s principal residence.

When applying for a mortgage loan modification you must demonstrate to the lender that you have an existing hardship that makes it impossible for you to make your current monthly mortgage payment. The hardship must be supported with fmancial and other suitable documentation including your monthly income, expenses and assets. All documentation must be submitted for review by the lender. The lender will ask you for copies of your most recent pay stubs, tax returns and a hardship letter that explains your financial situation and problems. If based on the proofs that you submit you convince the lender that you have a hardship, the lender may agree to change the terms of your loan to make it possible for you to meet your monthly payments.

With eligibility decided, and the mortgage either delinquent or determined to be at risk of default, the lender then calculates the cost of mortgage loan modification versus foreclosure. If the benefit to the lender from modification exceeds that from foreclosure – that is if the modification would cost the lender less than foreclosure – then HAMP, by law, requires that the lender grant the modification. Otherwise, modification is optional. The lender then has to determine what monthly payment amount is affordable to you and acceptable to them. The target monthly mortgage payment must equal not less than 31% of the borrower’s monthly income.

The next step is the Trial Period. The lender offers the borrower a modified payment for a three month trial period. This period gives the lender time to verify and update the borrower’s information and to prepare the final modification agreement. The borrower must accept the trial period plan, supply requested information, and make all payments before the period ends. If the borrower meets all requirements, the modification takes effect on the first day of the month following the trial period. The lender may adjust monthly payments consistent with information received during the trial period. The modification agreement permanently changes the terms of the original loan. Once modified under HAMP, a loan may not be modified again under the program.

The loan modification process can be difficult and everyone’s situation is unique so there may be other solutions or options that tnay be more appropriate. It pays to explore all options, but if you decide to attempt a loan modification you want your application submitted correctly so that it has the greatest chance of success. Make the effort to thoroughly complete a financial statement, and to calculate the various formulas that determine your qualifications. This enables you to give accurate information to your lender. Confirm everything according to HAMP guidelines. Do not assume that your lender’s offer complies with HAMP or that bank personnel understand everything. The loan modification process can be challenging, but if handled correctly, the chances of success can be good.


Anthony J. Vignier, JD, CFP is an attorney and Certified Financial Planner in Kearny, New Jersey. He helps his clients with legal matters, asset and income protection strategies as well as investment guidance. Please call Anthony at (800) 707-5252 or send him a message through our contact form.


Continue Reading