Mortgage Missteps Hurt Your Credit

As the country continues to struggle through difficult economic times, new research indicates just how much your credit may be impacted by common financial missteps related to homeownership.  We first reported on how certain events affect your credit score when Fair Isaac and Company, or FICO, conducted their first Damage Points study in 2010.  Our Credit Score Secrets Revealed video reviewed how financial missteps, like making late payments or filing for bankruptcy, can impact your credit score.  The new FICO study expands on that report by examining mortgage-related issues and, for the first time, provides an idea of how long it will take your credit score to recover.   

The new research conducted by FICO considers the impact of several common mortgage missteps, including 30- and 90-day delinquencies, short sales, foreclosures and bankruptcies.  The study shows the impact each action would have on three different types of homeowners – one with a fair credit score of 680, one with a good credit score of 720, and one with an excellent credit score of 780. The study assumed that each homeowner was current on their mortgage prior to the events in question. We won’t cover all of the various outcomes, but we’ll focus on some of the more surprising aspects of FICO’s findings.

First, let’s examine what happens with a 30-day mortgage delinquency.  For those with a fair credit score of 680, a 30-day delinquency will reduce their score by roughly 60 points, a loss of 8.82% of their score.  For the homeowner with a good credit score of 720, falling a month behind drops their score by approximately 70 points, to 650, a 9.75% reduction.  Finally the homeowner with an excellent score will see their score drop by roughly 90 points, or an 11.54% loss.  See a pattern here?  The better your score, the more negative the impact is likely to be on your credit profile.

The same holds true for the time it would take your score to recover.  The credit score of the homeowner who was 30 days late on their mortgage will take about 9 months to recover from the event if they have fair credit.  If they have good credit it will take about 2.5 years to recover, and if they have excellent credit, 3 years to recapture their standing.

For the first time, FICO also reports on the impact of short sales. A short sale occurs when a lender agrees to accept less than what a homeowner owes on a property to avoid foreclosure.  Depending on the lender, and your circumstances, your lender could agree to waive any leftover balance on the property. This is something you’d need to get in writing before the sale, not after. If there’s no agreement, a deficiency balance would become payable to the lender.  In a straight short sale, with no remaining balance, a consumer with fair credit would experience a 50-point loss in their score.  Those with good credit would see their score drop by 95 points, and those with excellent credit would experience a drop of 105 points.  If a deficiency balance exists, those scores would drop even further.  Fair credit customers would experience a decline from 680 to 595, good credit from 720 to 590, and excellent from 780 to 640.  What is surprising about these short sale figures is that they dispel the notion that short sales have less of an impact then foreclosures.  The FICO study indicates that a homeowner with a deficiency balance would experience roughly the same point loss as if they had gone through foreclosure.  In both scenarios, short sale and foreclosure, those with fair credit would see their scores impacted for 3 years, and all others for 7 years.  Ouch!

Overall, the FICO report provides some interesting insights into the impact of common housing missteps.  It shows that the impact of the action and the corresponding recovery period is highly dependent on the individual’s current credit score.  Essentially, the higher your score, the more negative the impact on your credit profile and the longer the time needed to recover.  Obviously, the best way to protect your credit standing is to pay your bills on time, particularly on installment loans such as a house or a car; however, the economy has made this difficult for many people. If you’re having difficulty maintaining your mortgage payments, contact your servicer before any delinquency occurs. They may be able to work with you.  You can also contact a non-profit HUD-certified housing counseling agency, such as Cambridge, for advice from a nationally certified housing counselor.

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