A few weeks back I came across an article that detailed a new system in place with the credit companies to track the impact on credit scores crated by short sales, foreclosures and loan modifications.

This new scoring company created by the three national credit bureaus. Experian, Equifax and TransUnion has some numbers that should cause us to take notice. This new company is called VantageScore Solutions LLC, whoserisk prediction scores are now being used by some of the largest mortgage companies and banks has found that the way consumers handle their mortgage problems can have profound effects on their credit scores.

For example, some alternatives-- such as loan modifications that roll late payments and penalties into the principal debt owed on the house, actually can increase borrower's scores modestly. Refinancing of underwater, negative-equity mortgages may have little or no negative impact on the scores, even though the homeowners might have been tottering on the edge of serious delinquency before financing.

The Vantage score, the primary competitor to the long dominant FICO score, rates borrowers on a scale from 501, sub-prime, highest risk, yo 990, supre-prime, the lowest risk. Unlike FICO, where scores can vary by 50 to 100 points based on which bureau supplied the credit data, Vantage scores are approximately the same for each consumer.

When homeowners negotiate a short sale with lenders, they sometimes assume there will be relatively little impact on their scores. After all, the loan was paid off successfully and the lender voluntarily agreed to accept a lower balance than was owed. According to VantageScoreresearchers, short sales can trigger big drops in scores. An homeowner who may have had an excellent score of 862 could fall 120-130 points immediately as a result of a short sale. While it's true the lender may lose less money through a short sale compared with a foreclosure, it's still a negative event. The lender lost money, so scores should go down.

People who file for bankruptcy protection covering all their debts--mortgage, credit cards, auto loans, etc. --get hit with declines that are the scoring equivalent of a nuclear bomb: an average 355-365 point collapse on their scores. Plus bankruptcies will remain on borrowers' credit bureau files for 10 years.

The bottom-line good news about scores is that homeowners facing financial stress can experience minimal hits to their credit if they contact their loan servicer or lender early in the game, when they first realize they may have trouble making their monthly payments, and take the first steps toward a loan modification or refinancing. If borrowers wait and fall several payments behind before seeking a modification, they can lose 250-300 points on their scores and damage their ability to obtain credit, on anything, for years.