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This is a good question, because homeowners have some serious decisions to make about their other debt when they are unable to make the mortgage payment. There are a number of considerations here, though, and it can be difficult to determine what the best use of that money will be. It is not always best to pay off credit cards at the expense of putting away savings or trying to work out a solution with the mortgage company.

First of all, the owners need to decide if they are willing and able to save the house or not, because this will help them put their money through the best channels. If they are unable to stop foreclosure at all, then it might just be best to keep paying off the other personal debt, such as credit cards and student loans. It will not keep their credit score as high as it was before they started missing mortgage payments, but it may prevent even more drastic decreases in their scores.

But if they do wish to keep their home, the homeowners need to examine a few different options for doing so. Especially in terms of qualifying for a mortgage modification or foreclosure refinance, there is a fine line to walk between paying down other debt and establishing a savings account to use in paying down the mortgage to qualify for the workout plan.

In terms of paying down or off the personal loans, this can free up extra monthly income that the homeowners would be able to use once they qualify for a repayment plan or other solution. Banks do not want homeowners spending more than 50% of their total income on debt payments including the mortgage, so they will not approve a solution if the homeowners still have a large debt load. Using some of the money not being paid to the mortgage company to pay off credit cards can free up a significant amount of the owners' incomes.

This would also help if the homeowners were considering a bailout loan from a foreclosure lender. With the high interest rates that most of these lenders charge, it is important for the homeowners to have as much of their income as they can to dedicate to the monthly housing payment. Paying 29% on a credit card and 14% on a foreclosure bailout loan means that there will need to be enough income for the banks to decide to give the homeowners another chance.

But on the other hand, even though paying down other debt can improve the owners' credit scores and help them qualify for a solution to foreclosure, they also need to consider their savings accounts. The original lender may require several thousand dollars to start a forbearance agreement or modification, and the homeowners may not have this available if they have been focusing on paying down credit cards. As well, foreclosure loan sources may not be willing to lend the owners as much as is needed to pay off the mortgage in full, so they will be required to use savings to pay of part of the mortgage at closing. This also requires the owners to have enough savings to complete the loan.

In the end, the decision whether to pay down personal debt deserves careful attention by homeowners facing foreclosure. Although it can help preserve their credit scores, they may need extra funds if they have any plans to stop foreclosure and keep the house. If they are not able to save their home, then it may be best just to pay off debts as quickly as possible to make a clean break; but if they wish to prevent the house from being lost, they need to weigh the benefits of paying down debt to the disadvantages of having less money in savings to qualify for a plan.

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โˆ™ 2008-06-02 15:21:55
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Q: Does it help your credit to pay off your credit cards if you are forced into foreclosure?
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