If my home loan is underwater, does that hurt my credit?

HouseThankfully, this is pure myth. The short answer is – the value of your home does not impact your credit, but your payment history does.  The mortgage information included on your credit report includes: the original mortgage amount, the balance remaining, monthly payment, number of years of the loan, date the account was opened and payment history.  The payment history includes current and past payments, number of times account was 30, 60 or 90 days or more late.  None of this information includes the current value of your property, which is not included on your credit report.

Payment History

What hurts your credit is how you pay this underwater home loan.  If you don’t pay on time, this is the start of harming your credit. The more delinquent you are on payments, the more negative the impact.  There are worse situations than not paying on time such as:  stop paying your mortgage, walk away from your home, having the bank foreclose on your home, agree to a short sale, or file for bankruptcy.  Public records such as foreclosures and bankruptcies remain on your credit report for seven years.

Your credit score is impacted the most by your credit history which includes how you pay your bills or failure to pay them on time.  This represents 35 percent of your credit score. Severe delinquencies such as a foreclosure, short sale or bankruptcy have a major impact on your score. For example, a foreclosure or short sale can impact a score of 680 by 100 points and a score of 760 by 150 points. A bankruptcy can impact a score of 680 by 140 points and a score of 780 by 230 points.

It will take years to restore your credit and you may not be able to purchase another home for at least three to five years.  In addition with poor credit, interest rates will be higher for credit cards, auto loans and mortgages.

The best situation is to continue to pay your mortgage and wait until the home values increase enough so that you aren’t underwater.  If you don’t have the funds to do so, you may have to consider other means.  Just beware of the impact on your credit and the impact on your ability to use credit.

JRU on 60 Mins SetCredit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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