Foreclosure, Short-Sale Or Deed-In-Lieu Will Hit Your Credit Score, But How Much?

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April 22^nd, 2010

 

As we all know, your credit score will be affected if you were delinquent in making your debt payments. How badly will it affect your credit score if you were delinquent on your mortgage payments?

 

Credit Bureaus were previously uncooperative in revealing the fine details in reference to point losses on credit scores impacted by the various forms of mortgage delinquencies. We’re in better luck today as Fair Isaac Corporation, the inventor of the FICO score, shared some interesting and important facts thus giving us a clearer glimpse into the unknown abyss.

 

FICO which stands for the Fair Isaac Corporation was founded by mathematician Earl Isaac and engineer Bill Fair. The secret FICO formula took 12 years to develop and was introduced in 1970. It has since become the mother of all credit scores today.

 

Below is an average estimation of how your credit score will be affected:

 

1. 30 days late, expect to lose 40 to 110 points.

 

2. 90 days late, expect to lose 70 to 135 points.

 

3. Foreclosure, Short-Sale or Deed In Lieu of Foreclosure – expect to lose 85 to 160 points.

 

4. Bankruptcy, expect to lose 130 to 240 points.

 

It is difficult for credit bureaus to estimate the accuracy of impact since there are so many variables involved when comparing between borrowers. No borrower is created equal and therefore unique. For example, borrower 1 may have more credit accounts than borrower 2 including variables in payment behavior.

 

Maxine Sweet, Vice President for public education at major bureau Experian, indicated that some borrowers’ credit score may fall more severely than others even if it is regarding the same payment problem. She further elaborated by comparing 2 unique borrowers who missed a payment. Maxine indicated that the borrower who has a mortgage with one credit account will experience a harder hit than the other borrower who has a mortgage with 16 credit accounts. She concluded that people with superior credit scores will experience a harder hit from a single blemish compared to a lower scored borrower.

 

Foreclosure, Short-Sale or Deed-in-Lieu

 

When it comes to foreclosure, the severity of point loss is more drastic. A borrower can lose their home in the 3 distinct ways, foreclosure, short-sale or a deed-in-lieu of foreclosure whereby the borrower returns the property and the bank forgives the owed balance. For the above 3 circumstances, credit bureaus have been reported to deduct points equally. As a result, borrowers will be reported as paying less than the settled account.

 

It is a myth to believe that someone who has never missed a payment will experience little or no impact on point losses if he or she decides to walk away (strategic default) from their home. As noted, a deed-in-lieu or a short-sale will be reported as partial payment and regarded as serious delinquency similar to a foreclosure.

 

For borrowers who have never missed a payment in years, a short-sale or a deed-in-lieu will negatively impact a borrower’s credit. As a result of the above, it is estimated that a borrower with a 680 score will lose 85 points while a borrower with a 780 score will lose 160 points.

 

Bankruptcy

 

Mortgage debt along with other financial setbacks can send borrowers into bankruptcy causing the worst blemish to their credit.

 

According to Maxine Sweet, Chapter 13 bankruptcy which involves partial repayment over the course of several years will scar the borrower’s credit for 7 years. A Chapter 7 bankruptcy which includes the liquidation of assets will take 10 years to heal.

 

The negative impact on credit scores will eventually cost borrowers more money when it comes to securing credit cards, vehicle loans, insurance and including renting a home.

 

Maxine Sweet from Experian advises borrowers who are financially distressed on mortgages to cut their losses now and not delay the problem. She said not to worry about the credit scores for now but more importantly focus on getting their finances back on track.

 

 

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