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FORECLOSURE AND BANKRUPTCY

Foreclosure Impact on Credit Scores

Written By:
March 17, 2010 at 8:06 AM

Death and taxes are two certainties in life. Another notable certainty is if you fall behind on your mortgage payments, it will negatively impact your credit score. That’s a given. The uncertainty, though, lies in the extent of the impact.

Historically, that has been an elusive number. Major credit reporting agencies were non-disclosing as to the specifics of just how many points to the credit score were subtracted for different defaults and foreclosure types. There can be a disparity of 50 points or more between two borrowers who are both 30 days, 60 days or 90 days late, or in foreclosure with their mortgages.

Founder of FICO scores discloses Foreclosure impact on Credit Scores

Fair Isaac, the founder of FICO scores, recently allowed an enlightening peek, sharing several ranges of point estimates by which a credit score might be reduced due to late mortgage payments. If you are 30 days late, the score will be reduced by 40 to 110 points. For 90 days late, it will be lowered by 70 to 135 points. For those in a foreclosure, a deed-in-lieu or short sale, the hit will be 85 to 160 points. Bankruptcy will cost consumers 130 to 240 points off their credit scores.

To determine the ranges, Fair Isaac used two theoretical consumers for their example. The range for FICO scores begins at 300 and extends to 850. One consumer initially has a fair-to-middle score of 680. The other has a very good score of 780.

In theory, the person with the 680 score has six open accounts, a short credit history, high usage of credit limits and has been late on two payments in the past. The person with the FICO score of 780 has 10 open accounts, a long credit history, low usage of credit limits and has no previously late payments on any accounts. Neither consumer has accounts in collection or negative marks on their public records.

Credit Scores have imediate drop after first late Mortgage Payment

Both borrowers experience an immediate drop for one 30-day late payment, as much as 110 less points for the 780 scorer. Fair Isaac spokesman, Craig Watts, notes that the decline becomes more dramatic when they get deeper into delinquency. Accounts 90 days or more late are viewed with greater scrutiny by the lending industry, says Watts. It is significantly less likely that consumers will get back on track once they’re past due 90 days.

Credit Card Companies follow with increased interest rates

Credit card companies have been tight-lipped, since they cannot specifically state to what extent each delinquency will impact credit scores due to the many variables. Some consumers will experience a deeper descent than others for the same 30 day late payment noted Maxine Sweet, an executive at Experian, a primary credit reporting agency in the U.S.

Sweet stated that someone with few accounts and one mortgage would receive a bigger hit for one missed payment, as opposed to someone with a mortgage and a larger number of accounts. Consumers with higher credit scores have much more to lose than lower scoring consumers. For one late payment, an 800 score will be more impacted than a 500 score. Foreclosures only compound the situation worse.

Interestingly, Sweet noted that credit reporting agencies cut scores equally for a foreclosure, short sale or deed-in-lieu. What’s reported is that less was paid than owed when the account was settled.

Homeowners who were always on time sometimes believe they can abandon mortgages with little impact to their scores. Au Contraire. Watts said that short sales and deeds-in-lieu are treated as seriously as foreclosures, since they are reported as partial payments. What will it cost faithful borrowers who ditch their mortgages? A 680 score could see 85 points taken off, while someone with a 780 score could experience a hit as high as 160 points.

If foreclosure isn’t enough, some borrowers descend into deeper financial woes like bankruptcy, which is the lowest blow a credit score can experience. It will take seven years to remove a Chapter 13 bankruptcy and 10 years to get rid of a Chapter 7 bankruptcy. The effects are long-term.

Lower credit scores will cause higher premiums for insurance and higher interest rates for credit cards and secured loans. Savings are substantial for those who have higher credit scores, and it may even make renting more difficult since landlords typically evaluate credit scores for assessing quality prospective renters.

In spite of issues poor credit can cause, Experian’s Sweet advocates that consumers unable to pay their mortgages cut their losses quickly; don’t drag it out. Her recommendation is to disregard the credit score, and do what is necessary to get the finances back on track.

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