In 2009, 5.4 million Americans were behind -- called default -- on their mortgage payment, but as many as 20 percent of them were "planned," according to the Wall Street Journal. This happens because it can be in a homeowner's best interest, financially and for a credit score, to walk away from a home rather than struggle to make monthly mortgage payments.
Identification
Whether late payments or a foreclosure is worse for your credit score depends on how many months late you are. Being late by 30 or 60 days won't affect your credit score much once you become current again. Having a payment late by 90 days is much more serious and lowers a credit score 70 to 135 points, while a foreclosure does 85 to 160 points of damage, according to CNN. The 90-day late payment, however, makes future late payments much more serious.
Potential
Even though foreclosure is worse than several late payments in the short term, it might be better for your score's long-term health to accept foreclosure. Bad items stay on a credit report seven years. Struggling to pay off a mortgage and constant late payments might mean you will never be able to get a score back into the excellent range.
Deficient Balances
If your lender sells your home but the selling price isn't enough to pay off the mortgage, most states allow lenders to pursue the borrower for any remaining balance . This could mean letters and phone calls asking for the deficient balance or a lawsuit that might include wage garnishment or a liens against other property. A lien or any other public judgment continues to count against your credit score.
Tip
Creditors hope to avoid foreclosure, because it often means the bank takes a loss. Once you become late on your payments, you can use that as leverage to negotiate a lower monthly payment or a deferment. This hurts your credit score, but could make life less stressful. If you have not yet defaulted on your mortgage, you can probably refinance -- switching your mortgage with a new one at a lower rate, suggests Liz Weston of MSN Money Central.
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