A new study conducted by credit bureau TransUnion found that a person who defaults on a mortgage, but no other debts, is considered to be a less risky borrower that some might expect. Since economic conditions played a huge role in why so many people have defaulted on their mortgages, lenders are much more lenient on borrowers in this circumstance.
Mortgage-Only Defaulters Are a Lesser Credit Risk
Individuals who have defaulted on their mortgages are less likely to later default on their new car loans or credit cards than those who default on their mortgage and another debt at the same time, says the new TransUnion study called “Life After Foreclosure.”
As explained to USA Today by Steve Chaouki, TransUnion’s vice president, mortgage-only defaulters “are less risky than they appear.” As a result, “lenders will want to lend to these people in the future,” he said.
TransUnion found that the main reason mortgage-only defaulters are viewed as a lesser credit risk is because many lenders understand that millions of homeowners have been foreclosed largely due to unforeseen layoffs and mismanagement foreclosure procedures.
Lenders are also sympathetic to those who strategically defaulted on their loans–those who could afford to pay their mortgages but walked away because their home values had dropped so low.
Credit Scores of Mortgage-Only Defaulters Bounce Back Quicker
The study also found the credit scores of individuals who have defaulted only on mortgages bounced back quicker than those with other defaulted debts.
For instance, those with Vantage credit scores (a competitor to FICO scores) that ranged from 631 to 650 saw them increase a median of 8 points 12 to 17 months after defaulting on a mortgage. People in the same credit score range who had multiple defaults saw their scores drop by 2 points over the same period.
Overall, the study determined that mortgage-only defaulters should not fall into the category of the habitual defaulter since their likelihood of future defaults is significantly lower than individuals with multiple defaults.
The spells good news for those who have defaulted on mortgages as it means they may be eligible for new loans in the near future.
