If you stop paying on your mortgage or consider a strategic default, your credit score will take a big hit.
Q: Let’s say I stop paying my mortgage each month. And let’s say there is some time before the house is foreclosed. Who continues to cover insurance, utilities and such? What impact does a deed-in-lieu of foreclosure have on my credit rating?
A: I think you might be a bit confused about what a foreclosure is and how the process works.
Let’s start at the top: You are responsible to pay your lender the amount you owe under your loan. At the same time, you are also responsible for paying your utility bills and your insurance payments.
If you stop paying your lender, your lender could decide to pay the homeowner’s insurance premium on your home and the real estate taxes that are due. But those expenses are paid on your behalf, and the lender has the right to come after you for those payments in the future.
If the home does go into foreclosure and the home is ultimately sold at a foreclosure sale, the lender gets to use the money from that sale to pay any amounts owed the lender. If there are not enough funds to pay off the lender, the lender, in most states, has the right to sue you for the deficiency and try to collect whatever the lender can get from you, even after the home is sold.
If you stop paying your mortgage lender, you need to know that if you live in a state that allows deficiency judgments, the lender can pursue you for years to come. Worse, the lender can sell off the debt you owe to a collection agency, which can pursue you for years – unless you file for bankruptcy and get the debt wiped off.
While you may have decided to stop paying your mortgage because you believe yours is an underwater mortgage — that is your home is worth less than what you owe on the mortgage — the legal obligation to repay the debt on your home is still yours.
Finally, please understand that when you stop making mortgage payments, your credit history will take a big hit. Going into foreclosure is even worse for your credit. You might find that your credit score has taken a hit of anywhere from 150 to 250 points and you might end up with a credit score in the low 500s after the foreclosure sale.
A deed-in-lieu of foreclosure is a little better for your credit history, but not much.