Mortgage trumps title when it comes to foreclosures, credit

Dear Credit Care,
I lost a $1 million dollar property to foreclosure. (I was removed from the title before the foreclosure). I don’t have any other debt, except for my school loan of $42,000. How can I remove that debt from my credit report and also raise my credit score of 670? — Maria

Dear Maria,
I am sorry to hear about your property foreclosure. You are among many Americans who have unfortunately lost their homes to foreclosure, and I’m afraid I have only more bad news as far as the loan associated with the foreclosure and your credit report is concerned.

You mentioned that your name was removed from the title to the property. That means that you are no longer an owner of the property. It does not, however, absolve you of responsibility for the mortgage loan for that property. The only way to be removed from the mortgage loan is for the original loan to be paid in full through a refinance or other payment. Unless that happened before the foreclosure, the item on your credit report is accurate and cannot be removed. So, the defaulted mortgage loan that led to the foreclosure will remain on your credit report for seven years from the date the loan went into default.

But I do have some good news. Your current credit score of 670 is approximately the middle range for qualifying interest rates for loans. Should you need to borrow money now, you would not have to pay the highest rates of interest for a loan. For example, the national average interest rate for a 48-month new car loan for a FICO credit score of 720-850 is 4.21 percent, as of Sept. 16, 2011. The national rate for a FICO score of 500-589 is 17.68 percent. Your FICO score would fall in the 660-689 range and a national rate of 7.72 percent. The differences in interest paid for a $25,000 loan are as follows:

Credit score range	Interest rate	Interest paid
Top (720-850)	4.21%	$2,208
Middle (660–689)	7.72%	$4,140
Bottom (500–589)	17.68%	$10,049
Source: MyFICO.com. Data accurate as of Sept. 16, 2011.

With your current credit score, you’d end up paying almost double the amount of interest that you would with a top-tier credit score. However, the good thing is that you’d pay less than half as much interest as you would with a bottom-tier credit score.

Your credit score will continue to rise as time passes, and as you add positive information from your current accounts to your report each month.

One last piece of advice: I would encourage you to be proactive and mention the foreclosure on your credit report before anyone reviews it. It is usually better for lenders, employers, landlords, etc., to hear the news of a less-than-stellar credit report from you first rather than find out while reviewing your report.

Handle your credit with care!

See related:FICO reveals credit score damage from foreclosure, How defaulted mortgage loans affect credit, What you need to know about credit reports and scores