When it comes to your credit score, there are many factors that can affect it, both positively and negatively. One of these factors is having an underwater mortgage. But what exactly does it mean to have an underwater mortgage and how does it impact your credit score? In this article, we will explore these questions and provide you with the information you need to understand the potential impact of an underwater mortgage on your credit score.

What is an Underwater Mortgage?

An underwater mortgage is a term used to describe a situation in which a homeowner owes more on their mortgage than their home is currently worth. This can happen for a variety of reasons, such as a decline in property values or an increase in interest rates. 

To explain, let’s assume you bought a house for $200,000 using a 30-year mortgage, and that you put down a 20% down payment and had an interest rate of 4%. If the value of the property dropped to $180,000, for example, the property is now worth less than what you originally bought it for.

In this scenario, you now owe more on the mortgage than the current value of the property. Because of this, you will now have a hard time selling or refinancing the property, as the value of the property is less than the remaining mortgage balance. This can make it difficult to make your mortgage payments, which can lead to delinquency or even foreclosure.

How Does an Underwater Mortgage Affect Your Credit Score?

The short answer is that an underwater mortgage can have a negative impact on your credit score. This is because when you are underwater on your mortgage, it can make it difficult or impossible to make your mortgage payments. 

Unfortunately, late or missed payments can have a significant negative impact on your credit score. The reason?  Payment history is one of the most important factors that is used to determine your credit score, and missed payments can indicate that you are a high-risk borrower. 

What’s worse is the fact that missing your payments as a result of having an underwater mortgage may also lead to foreclosure. Foreclosure is one of the worst items to appear on your credit report and it can cause even more damage to your credit score.

Luckily, however, it’s important to note that just because you have an underwater mortgage does not mean that your credit score will automatically be affected. It all depends on your personal financial situation and how you handle your mortgage payments. For example, if you are able to make your mortgage payments on time, even if you are underwater on your mortgage, your credit score will likely not be affected.

What Can You Do if You Have an Underwater Mortgage?

If you find yourself in a situation where you have an underwater mortgage, there are a few steps you can take to try to mitigate the impact on your credit score:

• Communicate with your lender. If you are having difficulty making your mortgage payments, it’s essential to communicate with your lender as soon as possible. They may be able to offer you options such as a loan modification or forbearance, which can help you to keep your mortgage payments current and avoid delinquency or foreclosure.

• Explore refinancing options. If you are unable to make your mortgage payments, you may be able to refinance your mortgage to a more favorable rate. This can help to reduce your monthly mortgage payments and make them more manageable.

• Consider a short sale. If you are unable to make your mortgage payments and are unable to refinance, a short sale may be an option. This involves selling your home for less than the amount you owe on your mortgage. While a short sale can have a negative impact on your credit score, it may be a better option than delinquency or foreclosure.

The Bottom Line

An underwater mortgage can have a negative impact on your credit score if it makes it harder for you to make timely mortgage payments. However, it’s important to remember that there are other factors that come into play to determine your credit score. 

It’s also worth noting that you can always improve your credit score. One way to do this is with credit restoration, the process of removing negative information from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.