One thing I am asked often by clients and other agents is the impact of Foreclosures, short sales and died of lieu on credit scores. If you're delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?
Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.
Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.
Here are the average hit your credit will take:
30 days late: 40 - 110 points
90 days late: 70 - 135 points
Foreclosure, short sale or deed-in-lieu: 85 - 160
Bankruptcy: 130 - 240
To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)
The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.
See the chart above to see how each scenario affected each borrower.
One reason credit companies were so closed-mouthed is that they often can't definitively state how much each delinquencies will affect scores because there are too many variables.
Some borrowers will fall much more steeply than others for the same payment problem. Picture someone who has just one mortgage and one other credit account. If they miss one payment that would impact their scores a lot more versus a mature credit user with 15 accounts, one missed payment would just be a blip.
The point loss also depends on the borrower's starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.
It gets worse when you face foreclosure, depending on whether you lose your home through foreclosure, short sale or deed of lieu.
Credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important thing is that it's reported that you paid less on a settled account.
Some borrowers may think that because they never missed a payment, they can "walk away" from their homes with relatively little impact on scores. Not true. When a deed-in-lieu or short sale is reported as a partial payment, it's treated as a serious delinquency just like a foreclosure.
Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.