Will “Forgiven” Debt Affect My Credit Score?

From the mailbag: 

If I owe $175K on a VA mortgage on my primary residence and the bank agrees to “forgive” $25K because the best I can sell my house for is $150K will this negatively affect my cerdit rating?

Most likely this will adversely affect your credit. The extent will depend on how the bank reports the “cancellation”. They could report it as a foreclosure, short sale, deed in lieu of foreclosure or anything in between. If it is a foreclosure then of course that would be the worst case scenario in terms of credit score. Even though a short sale and deed in lieu of foreclosure may not affect your score as adversely as a foreclosure it really shouldn’t be too big of a difference. Even though I can’t say by how much your score will fall, don’t be surprised by what you see.
Even though the reporting may vary, in the future, when you go to apply for a mortgage, the lender will most likely view all three as a foreclosure. An instance where you were not able to meet the mortgage payment and hence had to be releived of the obligation through legal action. Regardless of what your credit score is at that point or whether it says foreclosure or not, the new lender will treat it as such.
This isn’t a dire situation though. Lenders will still give you a loan but only after a minimum of three years after foreclosure. In fact you can get a 100% loan today three years after foreclosure, as long as you have maintained good credit since that time. I can’t say whether these loan guidelines will not change in the future.

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