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Has FICO score penalty for short sale increased?

By Artur Urbanski

Real Estate Broker/Owner with Cimpler Real Estate, Inc. CA BRE# 01330941

March 12, 2008 08:18 PM

In my post Credit consequences of the Short Sale we came to a joint conclusion that the FICO score penalty for short sale is 150 points and for foreclosure 300 points. I have just received an email from myFICO stating that there is no difference in the penalty for short sale and foreclosure:

"However, as far as your FICO score in concerned, there is no difference between foreclosures and short sales or deeds-in-lieu of foreclosures."

Is that true? Has it changed in the new FICO algorithm or was it the case all along? Or, possibly, it varies dependent on some other factors? I would appreciate your comments very much.

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Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

Arthur, the scoring model is used as a predictor of a person's debt repayment probability. It is different for mortgages, cars, etc. They even have a new one coming out for insurance.

When a person sells short or gets foreclosed on, their score will be low because the likelihood of them paying a mortgage payment on time is low. After all, they are currently behind so what will make anything different with a new loan (scores are for new loans, right?).

Either way, most people that lose their homes back away from the market for at least a year (3 years if they want A-paper). Over that timeframe, they could pay off credit cards from the money they are saving on housing. Doing this will raise the score and start to offset either F/C or short sale impact.

Hope this helps.

Mar 12, 2008 08:47 PM

Artur Urbanski

Cimpler Real Estate, Inc. - Burlingame, CA

Helping property owners to maximize property value

Thanks Mark for your reply. I understand the need for scoring model. My question was if the penalty is the same for short sale and foreclosure. We were under impression that short sale penalty was less severe. Therefore I am trying to understand if the penalty change with introduction of a new algorithm last September.

Mar 12, 2008 09:12 PM

Mark Organek

And the United States of America - Mesa, AZ

It's not a game, it's your life.

I understand. I am just so used to having this conversation with people that worry that their score would be hurt more with foreclosure. I will check on some of our clients that we have on our credit monitoring program for people that lost their home to short sale or f/c. I will look to see the differences.

The bureaus don't release their "black box" information in order to prevent people from knowing what to tweak. I have a breakdown of what makes up a score and I will email it to you later. It still won't answer your question directly but it should at least help answer some.

Mar 12, 2008 09:26 PM

Artur Urbanski

Cimpler Real Estate, Inc. - Burlingame, CA

Helping property owners to maximize property value

Thank you Mark - it would be interesting to know.

Mar 12, 2008 09:28 PM

Laura Giannotta

Keller Williams Realty - Atlantic Shore - Little Egg Harbor, NJ

Your Realtor Down the Shore!

I too am interested in this. I have been told that selling short does not have the same impact on credit scores as foreclosure. Am I mistaken?

Mar 12, 2008 09:49 PM

Tony Grego, 317-663-4173 #1 Trade Association for Alternative Inv

REISA - 317-663-4173 - Indianapolis, IN

I would think that if the folks with the short sales have paid on time (yes, this does happen) that it should have no effect on the score. Now it may change do to a new loan reporting for any shortgage?

Just a little confused on this one but a good post

Tony

Mar 12, 2008 11:05 PM

Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239

Real Estate One - Commerce, MI

Michigan homes for sale ~ yesmyrealtor@gmail.com

It will be interesting to watch what effect short sales do have on credit scoring. Thanks for the post

Mar 12, 2008 11:11 PM

Artur Urbanski

Cimpler Real Estate, Inc. - Burlingame, CA

Helping property owners to maximize property value

Thanks Laura, Tony and Russ for your replies. I was and am still working under the assumption that the penalty for short sale is smaller (150 points) than for foreclosure (300). At the same time, myFICO is owned by Fair Isaac company - inventors of the algorithm. For that reason their email that there is no difference in penalty (see the text of the post) puzzled me. Has something changed in the new algorithm, was it like this all along or whoever wrote the myFICO email does not know? I guess these are all options!

Mar 13, 2008 06:01 AM

Anonymous

I had a short sale in Jan 2007 and one in Aug 2007 and eight lates between the two. I currently (03/08) have 704, 670, and 640. However, I have other credit with no late payments and credit util under 50% and 15 years credit history. I was mid to upper 700 before short.

Mar 17, 2008 05:21 AM

Artur Urbanski

Cimpler Real Estate, Inc. - Burlingame, CA

Helping property owners to maximize property value

Thank you for sharing your experience. How many late payments did you have before the sale finalized? Did the lender allow you to apply without missing a payment or you had to miss payments to be approved? Did lender mail you 1099 for the difference at the end of the year? Please let us know. Thanks again.

Mar 17, 2008 07:57 AM

Anonymous

I had 8 lates between the two mortages. I was atleast two late before I could get anyone from loss mitigation on the phone. Although, I tried when I initially saw things going south. By the time of closing, I was 4 months. No, the lender did not allow me to converse before a missed payment and a contract in hand. Yes, lender did mail me 1099 for the difference at the end of the year. My acct wrote it off as a loss. He told me I am allowed 250 loss/gain in a given year and I was under the threshold.

Now, here it is a little less than a year from my short sale and I was approved for 488,000 fha loan with my boyfriend and my mid score is 680.

So keep your head up. Negotiate with the lender to give you a good credit disposition as condition of the short sale deal. The lender wants to do the deal as bad as you do.

Mar 27, 2008 07:31 AM

#11

Anonymous

I am about to do short sale on one investment property as my cash flow is negative about $800+ monthly and the property value went down by 30% or so. And I just lost my job last week. I have never been late on monthly paymentsand my FICO score is 800+. First, I was told to keep up with the payment, which I can do but does the lender agree to do short sale with no late payments? (I don't want to hurt my score so I would like to continue payments.) Second, I would reconsider the short sale if it really hurts my score as much as foreclose. If the score goes down by say 100, I can live with it if it will recover within a couple of years. Some people asked the same question above but it still doesn't seem clear to me. Can anyone please help? Thanks.

Sep 19, 2008 11:50 AM

#12

Anonymous

It seems everyone has the same question. Why is no one answering this question?

Dec 13, 2008 10:17 AM

#13

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