home foreclosure

     It is pretty much understood, that if in foreclosure or going through a short-sale, credit scores are going to take a hit.  What has not been clearly understood ... is just how much of a hit is felt?  Until recently, there had not been much of a barometer or "method" known for calculating or determining how these delinquencies would affect a FICO score.  Fair Isaac has recently revealed a little bit of information as to how they calculate that.

     Explaining the five components that make up a FICO/Credit Score might prove helpful here.  If they are known, the results of foreclosure, short-sale, and bankrurptcy will be better understood.

     First and most importantly ... there's Payment History.  Using this, FICO calculates future risk by studying past history of payments.  This important portion of the calculation equals a full 35% of the total credit score.  Credit card payments, student loans, mortgages, and the like are considered here.  In a nutshell, make your payments in a timely and consistent fashion, this portion of your score will remain healthy.

     A borrower's total outstanding amount of debt accounts for 30% of their score.  There are sub-components found within this accounting of debt.  A revolving line of credit will be weighed more heavily than an installment loan. 

     Example:  Credit cards are revolving lines of credit.  Credit cards have limits placed upon them.  If you're balances on your cards are high and close to maxing the cards out ... this portion of your overall score suffers.  This type of credit is taken into consideration more heavily than a car loan, which is an installment debt.  In FICO's mind, a borrower with high credit card(s) debt is a poorer risk for future debt because they've shown thacredit scoret they cannot handle their debt and spending in a responsible manner.  

     Next, making up 15% of the total credit score ... is the length of a borrower's credit history.  Taken into consideration here is the length of time an account(s) has been open and the length of time since the account has most recently seen action.  This is where it actually pays-off to have had some type of credit and not being paying by cash or check.  The lengthier this history is, the more insight FICO has into the historical behavior of a borrower regarding how they handle debt. 

     (This also explains why a lender may ask a younger borrower for further documentation of finances/debt ... or even recommend that they open a credit card/line of credit.  It gives them a "track record" for FICO to follow.)

    

      Opening too many lines of credit can be damaging though.  This remaining percentage of the components of your FICO score (10% and 10% each) are actually a mixture of new credit and the "mix" of your credit history. 

     To make the explanation of this easier, I've always likened a credit score to a "story".  For some borrowers that story is a full-length movie ... for some it's a short skit.  Open too many lines of credit and you run the risk of your "story" appearing like a long-running movie with a number of sequels ... movies that are filled with financial troubles, melodrama, and risk-taking.  Simply put, FICO isn't going to like it.  To get a five-star rating ... your story must flow smoothly, have perfect timing, and be low drama.  Payments must have been made on time, never late ... and your credit card balances should be low.

     It's important to point out here, that if you have a number of credit cards now ... do not think of closing or canceling the cards out.  Pay down the balances, use them infrequently just to keep them active and then payoff the balance charged immediately.  Closing the account out could actually harm your score, as it shortens your credit history.

     For those that are presently facing the trauma of a short sale or foreclosure ... how does all of the above play-out on their scores?  Where are those scores as they try to move forward financially?

     Using the guidelines recently given by FICO, here is an estimate as to the impact ohouse dominoesf differing levels of delinquencies:

     30 days late:   40 to 110 point drop

       90 days late:   70 to 135 point drop

       Foreclosure, short sale, deed-in-lieu:  85 to 160 point drop

       Bankruptcy:   130 to 240 point drop

     As you can see, as the delinquent payments become more serious, the point drop in score becomes more dramatic ... but for even one late payment the penalty in score is fairly severe.  And unfortunately, the effects of late payments on credit scores is long-lasting. 

     It's easy to lose points ... hard to regain and re-establish them.  It truthfully can take years.  A homeowner that knows they are in credit jeopardy needs to communicate and work with their lender as quickly as possible.  Forego the embarrassment and get help.  If the problem has moved beyond that point, they then need to assess their financial damages and forget their credit scores.  They cannot afford to let the scores rulehappy family them and keep them from doing whatever they must for themselves and their families. 

    

     The sooner the decision is made to short-sale or foreclose, the sooner they can start to rebuild their lives, their financial health, and their new improved credit scores.

    

   

      

    

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This post has been included in Illinois Real Estate News Will County, IL Real Estate News
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78 Comments on FICO SCORES ... How They're Arrived At ... How They're Affected by Short-Sales, Foreclosures, & Bankruptcies

20 Most Recent Comments Displayed Show All

MAY
08
2010
307,045 Points 9 Featured Posts Localism Sponsor Outside Blog Attended Rain Camp Called Shot Master

Gene, great post and worthy of a reblog.  Question for you....a late payment hurts the credit score but after a year or so the damage is pretty much mute (in my observations at least) but how long will the foreclosure or bankruptcy hurt them?
10:29am • #59
985,855 Points 106 Featured Posts Localism Sponsor Outside Blog

You know what I've been wondering, Gene? If a borrower is 30 days late and then makes up that payment on day 59 but fails to make the present monthly payment, thereby running into another 30-day late, how does that reflect on one's credit report? Say you have been 30 days behind for 4 months (because you always bring the previous month current), is that reflected as 4 30-day late pays? And if so, is that worse than 120 days behind?
11:41am • #60
132,743 Points Outside Blog

Great post. Thank you for reminding us that we are more than just our credit score. Job loss, illness, death, are all things that happen in life and can put a tremendous strain on family finances. In these instances people are in survival mode and their credit score may have to take a backseat to the realties of life.
2:31pm • #61
129,939 Points

Thank you so much for this information.  I will be passing this on.
3:15pm • #62
289,789 Points 6 Featured Posts Called Shot Master

This is an excellent recap of the credit score calculation.  It's important to note that one should not stay in unsustainable debt just to maintain a credit score. I see way too many people consider their credit score before quality of life and economic stability.   IMHO, the FICO score is the greatest marketing ploy that the financial sector has every come up with - it's a form of debtors prison.  The credit score can be rebuilt with relative ease if the consumer is educated and proactive about it.  In fact, for the average person,  it's probably easier to rebuild a credit score than it is to regain lost money paid in interest to keep it.  

In an economy where far too many people are in financial hardship, far too many of us push the FICO score as the most important financial number in our lives.

For people who are not in a finanicial hardship, it is important to maintain or rebuild.  For consumers in a financial hardship and suffering with crippling debt due to loss of income, increased expenses or medical situation, a hit to the credit score can be a very smart financial decision.
5:23pm • #63

Wow....now can you tell us how long it will take to re-establishh our credit if everything gets back on course ?  Really Valuable info
Mark
7:02pm • #64
498,410 Points 150 Featured Posts Outside Blog Hit Router Called Shot Master

Chris, Christine an Marc:  It was very helpful that FICO let loose with a little more info and insight than they have in the past.  This extra info will definitely help many consumers better understand the damages felt when payments are late.  Thank you for writing ...

Melissa:  It is one of the most often asked questions for me as well.  This extra info more clearly shows the actual loss to scores ... which I think will be helpful.

Damon:  As with many things, just starting down the path to poor credit scores is where the most major damage occurs ... IMO.  I agree with you.  Just this one missed payment can keep someone wanting to buy (or refinance) from doing so for a length of time.  I don't think most people understand the true ramifications of that error.  As of right now, the price paid depends on whether the mortgage held was a conventional loan or FHA loan (re: foreclosure) .... and there is a difference between the time you must wait dependent on it being a bankruptcy or foreclosure. To make it even harder to explain ... these "rules" can change quickly.  It truly makes offering hard and fast credit guidelines a tricky proposition.  I'm going to try to write another post re: this topic again this upcoming week.

Elizabeth:  You don't ever want to show either .. obviously.  IMO, it is a minor difference and most likely a mute one within the current underwriting atmosphere ... but again, IMO it is better to be only 30, 60, 90, days late than a longer term.  This is my interpretation of this scenario.  As you know, one lender's underwriter vs another may see it differently.  It is best to present the individuals' payment scenario to the lender involved and let them make that determination.  Thanks for writing ... and asking the question ...

msWoods Realty:  I'm glad you found this article valuable and thought-provoking.  I appreciate your writing and letting me know ...

 Gary:  This new info ... come to light via FICO and the media ... does help clarify this issue.  Something that will help us all in the future ...     

Kate:  Well said.  I have heard that they are reviewing and considering making the credit score a moot point in the setting of insurance rates ... and also making it illegal to run when considering employment.  It will probably be a length of time before a final decision is made regarding these issues ... but given the current financial hardship felt by so many ... it seems to me to be a fair thing to do ... at least in the short term.  I appreciate your input ... and your writing ...  

Mark:  It's hard to give you any definitive info on that without being more well-versed on the debt's severity ... and the type of debt being discussed.  I will tell you this ... as a rule of thumb ... it's much easier to do damage to your credit score than it is to repair it.  Protecting your score is always the best route to take. 

Gene
10:31pm • #65
MAY
09
2010
1,068,614 Points 70 Featured Posts Outside Blog Called Shot Master

We give our short sale sellers credit repair sources so that they can begin rebuilding their lives,,,,we are amazed sometimes at the speed that can happen...if everything BUT the mortgage is in good standing.
7:34am • #66
498,410 Points 150 Featured Posts Outside Blog Hit Router Called Shot Master

Sally and David:  Yes, it can be done with diligence and consistency.  People need to realize this.  All is no lost forever and it's not the end of the world.  You can rebuild ...

Gene
11:19am • #67
985,855 Points 106 Featured Posts Localism Sponsor Outside Blog

Thanks for your feedback, Gene. I was wondering about the 4 30-day lates as opposed to one 120-day late because some lenders force sellers to stop making their payments to grant a short sale. Sellers who could otherwise afford to make their payments and want to make their payments. Naturally, I get asked if they could just stay 30 days behind to qualify -- and the answer to that question is yes. But I don't have an answer for them as to how all those 30-day lates affect credit -- nor would I really want to tell them even if I did know since every creditor's situation is different. But I was just curious.
3:30pm • #68
580,685 Points 37 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Gene ~ congrats on this featured post!  It's a very succinct and well-written explanation of how FICO scores are determined and impacted by current market forces (especially for novices like me).
4:35pm • #69
MAY
10
2010
164,493 Points Called Shot Master

Thanks for wonderful informative post. I am subscribing to your post as of now. Realistically how long will one have to wait after Chapter 7 to be able to buy a home? If someone who files Chapter 7 comes into money in 12 to 24 for months after discharge, what effect does going back and paying creditors have on the FICO score?
1:14am • #70
584,338 Points 1 Featured Post Outside Blog Attended Rain Camp Called Shot Master

An excellent post:  Short and not so sweet.....but to the points.

 

I'm probably the last one in the country to re-blog this, but here goes....
5:51am • #71
217,195 Points 1 Featured Post Attended Rain Camp Called Shot Master

Good stuff Gene.  Re-blogging for those in the Janesville and Madison WI areas.  Keep up the good work!!

Michael Collins - Broker
Rock Realty
www.RockRealtyWI.com
8:48pm • #72
498,410 Points 150 Featured Posts Outside Blog Hit Router Called Shot Master

Elizabeth:  Understandable.  Supplying someone credit information blindly is very unwise.  Even offering the info that I did in this article (via FICO release) makes me somewhat uncomfortable ... as someone is going to take it as gospel instead of a "rule of thumb".  Mortgages, credit, finance has all become so specific to the individual's personal scenario.  You have to add the lender being used before you can even begin to get near specifics. Throw special situations like short-sales and foreclosures or bankruptcies into the mix and you can see how intricate the process is.  LO's are not trying to be evasive ... it's just difficult to give definitive answers when there are so many variables.  Thanks for writing again Elizabeth.  You ask a very good question .. one that is most likely asked of many agents and brokers.

Maureen:  Thank you for your kind words.  It's appreciated.  Don't be put off or quit asking questions.  In this day and age of quickly-changing financial and credit changes ... even so-called "experts" need to ask questions often.  Please feel free to ask me anything.  I'll help if at all possible ...

Tom:  Thanks for subscribing.  I'll be answering more questions re: credit soon.  I'll try to be more specific and answer your question at that time.  Again, credit and the issues surrounding them are so specific to the client's scenario and the lender involved ... it's hard to clearly define answers without acquiring that info first.

Jim:  I appreciate the re-blog.  I'm honored.  I hope it serves you and your readers/clients well.

Rock Realty:  Thank you for re-blogging the article.  Sure hope it helps those in your area.  My wife has many relatives in that and the surrounding area.  Her mom grew up in Brodhead.  Good people!

Gene 
9:23pm • #73
MAY
14
2010
217,195 Points 1 Featured Post Attended Rain Camp Called Shot Master

Gene,

Brodhead is not very far at all.  This area is a great place to live.  If anyone you know ever needs some realtor assistance in the area, let me know!  Go Badgers!! :)

Michael Collins - Broker - Rock Realty
Rock Solid Real Estate Strategies
www.RockRealtyWI.com
1:47pm • #74
MAY
26
2010

Gene - Thanks so much for explaining this so the average consumer can understand how FICO scores are rated and how your decisions can affect the scores. Like others I am bookmarking this to use as a tool when talking with clients.
10:19am • #75
498,410 Points 150 Featured Posts Outside Blog Hit Router Called Shot Master

Kathie:  I have met so many AR members that I did not know previously because of this one article.  For that I am really greatful.  I'm glad that this proved helpful to you.  There were some very good questions written in response to it ... so I'll be following up with more info in the very near future.  In the meantime, if I can clarify anything, please let me know.  Thank you for writing, Kathie ...

Gene
10:58am • #76
JUN
07
2010
664,612 Points 17 Featured Posts Localism Sponsor Outside Blog Attended Rain Camp Called Shot Master

Gene- I don't know how I missed this, but it is so concise and easy to follow!   I, alomg with half of your commenters, am going to reblog this!

Thanks a million!
10:09pm • #77
498,410 Points 150 Featured Posts Outside Blog Hit Router Called Shot Master

Hi Dagny!  It's easy to miss something here on AR ... there's so many good blogs to read and soak up.  I appreciate your kind words and gesture.  Hope it helps someone ... and proves beneficial to you too!

Gene
10:42pm • #78

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