How mortgage delinquencies affect credit scores

Below, taken directly from an article published on the FICO® Banking Analytics Blog:

Research looks at how mortgage delinquencies affect scores;


How much impact does a short sale have on FICO® Scores? How about a foreclosure? Since I frequently hear these questions from clients and others, I thought I’d share new FICO® research that sheds light on this very subject.

The FICO® study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780, respectively. I say “representative profiles” because we focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All consumers had an active currently-paid-as-agreed mortgage on file.

Results are shown below. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.

All in all, we saw:

•The magnitude of FICO® Score impact is highly dependent on the starting score.

•There's no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.

•While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.

•In general, the higher starting score, the longer it takes for the score to fully recover.

•Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.

This study provides good benchmarks of score impact from mortgage delinquencies. However, it is important to note that research was done only on select consumer credit profiles. Given the wide range of credit profiles that exist, results may vary beyond what's in the charts above.

My comments/analysis, below:

If you were to look solely at the score comparisons of a short sale and foreclosure in the chart above, you might say that there is no advantage to a short sale over a foreclosure...however, I believe the above article and accompanying charts assumed that for the short sale, (as well as the foreclosure),  the mortgage payments had been more than 90 days delinquent. But, that does not have to be the case. We have had great success in assisting clients with short sales who have never missed a mortgage payment or have missed just 1 or 2...thus, one could surmise that this type of short sale would have much less of a delterious affect on ones credit score.

A short sale undertaken early enough allows the borrower to mitigate a lot of damage e.g. not having to miss mortgage payments. Short sales can and are closed without missed payments... in a majority of cases the borrower's default need only be 'imminent'. I believe it is the 'days late' on the mortgage history that is the prime factor in the degradation of the FICO® score.

This article/chart does not reflect what is the impact of the typical language added by a short sale (i.e. 'settled in full for less than the full amount') WHERE THE BORROWER CLOSES THE SHORT SALE WITHOUT MISSING A PAYMENT? A foreclosure by comparison (and by definitiion) will always have many missed payments.

Also, FICO® score is not the only consideration when comparing foreclosures and short sales. You can qualify for home loan financing within 2-3 years after a short sale. It can be up to7 years after a foreclosure. In addition, the current standard residential loan application asks whether you have EVER had a foreclosure. It does not (yet) ask about short sales. So if you had a foreclosure, 15 years from now, you would have to say "yes" to that question, or risk a claim for loan fraud.

Then there are job considerations when affects of a short sale are compared to the affects of a foreclosure that this article does not mention. If you have to pass a security clearance for your job, a foreclosure may prevent the issuance of the clearance. In this case a short sale is a better choice.

If you are in default on your mortgage or at risk for imminent default I recommend contacting a competent attorney who truly specializes in defending and protecting howeowners in default.


Give me a call on my direct line at 561-602-1258 if you'd like to discuss your situation and options.

Thanks,

Steve