FICO Reveals Impact of Mortgage Delinquencies

Mar
24
2011

You have to love it when the boys and girls in San Rafael, CA take the time to crank out statistics like the ones they produced Wednesday morning (3/24/11).  FICO has revealed the results of their research into how certain mortgage delinquencies impact the scores of 3 unique consumers groups…those starting with FICO 680, FICO 720 and FICO 780.

The credit scoring giant, and my former employer, teased us last year with similar data but this time they set a new standard with their willingness to provide direction on the impact of mortgage indiscretions, such as the often misrepresented impact of a short sale.  They also capped it off with data on how long it takes for your FICO scores to recover from the same negative events.

Has your score suffered because of mortgage delinquencies? Visit here to see your credit report and credit score online now

Executive Summary

Let’s start with the most common and worst of all the mortgage delinquencies on your FICO scores;  bankruptcy.  Not only does the filing of the bankruptcy damage your score but so does the litany of debts that are going to also show up as being included in the bankruptcy.  You get hit with the incident first and then the breadth of the incident.  FICO 680 becomes FICO 530-550.  FICO 720 becomes FICO 525-545.  And, FICO 780 becomes FICO 540-560.

And now, for the umpteenth time, short sales.  Mortgage delinquencies like a short sale with a deficiency balance (which they all have because that’s what a short sale is…a settlement for less than the full amount due), has the SAME impact as a foreclosure, regardless of where your score starts from (680, 720 or 780).  The following is the impact of both a short sale and a foreclosure; FICO 680 becomes FICO 575-595.  FICO 720 becomes FICO 570-590.  And, FICO 780 becomes FICO 620-640.  There is a slightly higher score result if there is no deficiency balance but you’d have to convince the lender to not report that balance, which of course would be incorrect credit reporting.  The following is from the FICO website charting the impact described above and other scenarios.

 

 

 

 

 

How Long For Your Score to Recover?

FICO’s data also includes “how long to recover” output, which is especially helpful for consumers who have already gone through some sort of mortgage related disaster and are wondering how long it will take for their FICO scores to claw their way back.  I’ll save you the suspense, it takes a LONG time for your FICO scores to fully recover from a negative mortgage event.

In terms of mortgage delinquencies, if you paid 30 days late, it takes a 680 nine months to recover.  It takes a 720 2.5 years to recover and it takes a 780 3 years to recover.  Kind of underscores the importance of paying your mortgage on time.  And, it also illustrates just how damaging the loan modification trial payment period can be if you’ve got great FICO scores.  If you did a short sale or foreclosure your 680 would take 3 years to recover and your 720 and 780 would take 7 years to recover.  That means while the item is on your credit reports your scores will not fully recover (evidence of a short sale or foreclosure remains on a credit file for 7 years). The following is from the FICO website charting the time to recover from certain scenarios.

 

 

 

 

 

 

A couple of observations that might not be immediately obvious…

– Better scores fall further (raw point difference) and take longer to fully recover.  This is because score movement is like water, it takes the path of least resistance.

– The amount of time for a 680 to recover from a bankruptcy is as little as half the amount of time it takes a 720 and 780 to fully recover.  This is because those stratospheric FICO scores require pristine credit files, and 680s do not.

– If you can convince your mortgage lender to NOT report the deficiency balance to the credit bureaus after your short sale your score will actually be a little better than if they do report the balance.  Good luck on that one.

The moral of the story…don’t miss payments!!

Has your score suffered because of mortgage delinquencies? Visit here to see your credit report and credit score online now

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

 

 

Comments

  • Pingback: Credit Score Recovery Time After a Foreclosure - NYTimes.com

  • Ruta Wagner
    March 29, 2011

    My sister filed for bankruptcy before the new bankruptcy law went into effect. Her debts were discharged before the new law went into effect. And yet, the credit reporting agencies are saying the detritus from the bankruptcy won’t come off her FICO scores for 10 years.

    The banks whose debts were discharged in bankruptcy have written on my sister’s credit agency reports that those debts will continue to be reported for a full 10 years. Is there anything she can do about this? Under the old rules, it was seven years.

    Thanks.

  • Pingback: Bucks: Credit Score Recovery Time After a Foreclosure

  • March 30, 2011

    The bankruptcy can remain on file for 10 years, that’s correct. That wasn’t addressed in the new BK laws. BKs have always been able to be reported for up to 10 years.

    The debts that were included in BK can’t stay on for 10 years. The law (FCRA) is very clear on that subject. Those will have to be removed 7 years after they went terminally delinquent. Those accounts will be removed from her credit reports 3 years before the bankruptcy will be removed.

  • Diana Madden
    April 10, 2011

    I have a question and I cannot seem to find the answer. I have two mortgages for two different rental properties that I am delinquent on. I moved, am a single mom with two kids and have had setbacks. I am current on my residential home that I bought five years ago (have never been late) and am current on all of my bills since mid-2008. As for the two rental properties — one I became deliquent on in December of 2007 and the other one in January of 2008. (I was never late and then I stopped paying completely). I am paying 18% interest on a car–I tried to re-finance and tried to buy another car (I drive 600 miles per week RT to work), and was turned down for a loan. I checked my credit reports and both mortgagees are going in each month and reporting the delinquent mortgages as current. What is up with that? The properties have been in foreclosure for three years and tied up in investigations because of their lawyers’ fraudulent documents. Please advise.

  • April 11, 2011

    Hi Diana, There’s clearly something bad on your credit reports because an 18% rate on an auto loan is extremely high. I would think that you’d be thankful the mortgage companies are reporting the mortgages as current, despite the fact that it is incorrect credit reporting. When you were denied the auto loan the lender was required to send you a declination letter (called a Notice of Adverse Action). That letter is supposed to give some general details as to why you were denied.

  • Lamar Charles
    September 15, 2011

    After receiving a Hamp and having your mortgage balance reduced, will/should the mortgage company report the new balance to the credit agencies? Will it benefit me as far as my credit score to have the lower reduced balanced reported? Currently my credit report shows the original balance of $278,000.00 but my actual balance is $178,500.00 which shows on my monthly statement and on the mortgage company’s website.

  • September 16, 2011

    Hi Lamar. Thanks for your question. Just so other readers know what we’re talking about…HAMP is the government sponsored loan modification program. If your balance has been permanently lowered then yes, that new balance should be the new norm on your credit reports, no doubt.

  • Belle Hill
    January 19, 2012

    I have a question re: short sales. We are not and have not been late on our mortgage. We need to move because the public schools in our area are horrible, and we cannot afford private school. The market has plummeted here, and we’d need to list our house for approximately 100K less than our original purchase. The difference, coupled with the commission is making us consider asking the bank for a short sale. What would the effect be on our credit, since we are NOT late? Would we be able to immediately get another mortgage?

  • January 20, 2012

    Your scores would get killed by the short sale especially if you’ve got good credit right now (and don’t let your real estate agent suggest otherwise). Silly question, why in the world would you want to buy another house right now? The market is still terrible. I’d suggest renting in the new area. That way you’re not locked into a mortgage on a house that might actually lose more value.

  • Dana
    February 15, 2012

    Hi, we are currently about $50,000 underwater on our mortgage. Our family is growing and my husband started a new job in august. We have only been able to make our mortgage payments due to money given to us from family and we will no longer have help from them. We plan to enter in to a short sale and move in with my parents for a while and then rent. We do not plan to buy again for at least a few years anyway. My question is, how much more damaging will it be to our credit if we are unable to make the mortgage payments during this process?

  • February 16, 2012

    Hi Dana. You’ve got 2 things with which to be concerned. 1) The late payments while you’re marketing the house for short sale. As the payment becomes more and more delinquent the more it’s going to hurt your credit. You’ll be populating your credit reports with ascending level of late payments, which will remain on your credit files for 7 years. This is where the score drop is going to occur. 2) The short sale is going to be reported as either a charge off or a settlement, both of which are accurate. Either of these is considered a major delinquency by the FICO scoring system. Given that your credit report is already going to be loaded with late payments before you’re able to complete the short sale your score will already have taken a hit even before the short sale is consummated.

    I’ve got to be honest with you…I’d love to be a renter right now. I mean, honestly, who in the world knows what the mortgage environment and property values are going to look like over the next 1,3,5+ years. There is a lot of speculation but nobody really knows. The only guaranteed value of buying a house right now is the interest tax deduction. Enjoy being a renter! It’s not a bad place to be for a while as this mess clears out. John

  • Dana
    February 19, 2012

    Hi John. Thanks so much for your reply, I really appreciate it. The impression that I’m getting is that our credit score will obviously be affected and our report will show any of these negative transactions for 7 years. It sounds like any future purchases (real estate) will be up to the discretion of the lender even once our score has rebounded. We plan to stop making our payments as of next month. Once that affects our credit, is there much difference between how a short sale, deed in lieu, or foreclosure will additionally affect our credit? Again, we plan to rent for a few years. In your opinion, will we be able to buy again in a few years, say 3 or so? Do you think the delinquent payments on our report for 7 years will prevent us from being able to buy in those 7 years? If so, we may as well foreclose.

  • Vanessa
    February 23, 2012

    Hi John,
    I was wondering how long does it take after the short sale is closed for the new FICO (lower) to show? Couple of days? Is it possible to apply for a credit card immediately after the short sale closes, assuming credit still shows as good due to never being late? Or how about buying a car in the same time frame?
    thanks a bunch!

  • February 24, 2012

    Hello Vanessa. The real issue is how long will it take for the lender to report the settlement to the credit reporting agencies. That can take as long as a month, but will likely take less time. If your credit is good prior to the short sale then you probably wouldn’t have to time it like you’re suggesting. You can apply for a car or credit card now, if you like. John

  • Bob
    July 7, 2012

    Probably less common, but my FICO score went up after foreclosure. I went up from 820 before foreclosure to 900 one year after foreclosure. I believe it is because I have tons of credit to begin with but never use it. When my mortgage was wiped away, so was my debt to income ratio. No longer straddled with such heavy debt, I apparently look like a better credit risk than before.

  • July 9, 2012

    Hello Bob. Just to clarify, your FICO score didn’t go up to 900. FICO’s range is 300-850 so that’s probably your VantageScore, as it caps out at 990.

  • Debmlittle
    July 11, 2012

    I had a forbearance agreement and was not late before entering in to the agreement. Now I am finding in spite of the forbearance agreement the mtg co. is reporting me as late. My score went from 710 to low 600’s. I don’t understand how they can ruin your credit when you made a forbearance agreement. I was unemployed now I have a job but most companies do a credit check. Is there any way I can fight them reporting me? I’m currently in the process of a modification but the forbearance is still in effect. I’m trying to get back on my feet. If the modification doesn’t go through then I will have to make up the back payments with interest, late charges. It seems like they just set you up.

  • July 12, 2012

    I don’t suppose you got that forbearance agreement in writing? Normally those agreements tack on unpaid interest on the back end of the loan.

  • Dan Curran
    July 24, 2012

    I recently was 90 day late on my mortgage. i got a loan from my 401k and paid it off. I now have paid two months on time. I was denied cosigning a loan for my son’s college tutition. How long will it take before I am able to cosign on a loan.

  • July 25, 2012

    That’s impossible to answer, Dan. Lenders all have different lending criteria and they don’t generally publish their guidelines. I imagine you were denied b/c the 90 day late payment is so recent that it is dragging down your credit scores. As the late payment gets older your score will improve organically. You can accelerate the improvement by paying off/down credit card debt, if you have any.

  • Jake
    July 30, 2012

    John,

    We did a Short Sale back in November of 2011. Our bank wiped out the remaining amount. We need to purchase a bigger car but I’m not sure if our credit has recovered to the point where we can get a good deal. How long does a short sale affect our credit?

  • July 31, 2012

    Look at the chart in the article above your comment. It will show you the impact of a short sale without a deficiency balance being reported. Alternatively, you can check your FICO scores at myFICO.com just to be sure.

  • August 9, 2012

    John,
    We recently were granted short sales for 2 rental properties with no deficiency balances. We have about $50k in credit card debt which we usually pay only the minimum payments for. We were considering negotiating a lower payoff on the credit cards since our credit has already been negatively impacted by the short sales. From reading the above comments I’m aware that the short sales will show on our credit reports for 7 years. My question is twofold- 1) should we even be considering this option & 2) how much more of an impact would the lower payoffs have on our credit?

  • August 9, 2012

    The sooner you can settle those credit card accounts the better. Why? Because those types of negative items remain for 7 years, each. It would be great if you could rip the band-aide off so in 7 years everything is gone. Make sense? Adding more settlements is obviously going to hurt your scores, but is that really important to you right now?

  • KC
    October 17, 2012

    Hello John,

    A year ago we received a modification. Due to family illness my spouse had to stop working to take care of our sick child. I have a government job which requires a clearance and now I am facing the possibility of losing my job of 20 years because of this negative late payment that is showing on our credit report, despite high credit score of 720/760 we are unable to be financed at a decent rate to get a new vehicle which we are badly in need off. There is nothing else damaging on our credit report and have always paid as agreed except for the mortgage that reflect 120 days late, and paid as agree there after. We have credit cards with very low balance, we use one month and pay off the next month.

    Is there anything we can do to get the delinquency remove, I really don’t want to lose my job. The modification amount was 10 dollars less than previous payment with all missed payment and interest lump back into the loan. My husband is back to work and receive decent salary.

  • Kevin
    October 17, 2012

    Thanks for the insight from an insider. Amazing how hard it is to get a straight answer. As a real estate broker, we are inundated with information that says a borrowers credit will rebound to its original levels in as little at 2 years after a short sale. Of course none of this informaton ever sites their sources. I can speak from personal experience however that I’ve successfully executed new real estate transactions for borrowers that have actually short sold their homes within the last two years (well slightly over the 2-year mark actually). Do my personal experiences contradict your comments and charts in your credit blog? The other alternative answer is that the credit market is lossening up and lenders are making loans to this type of borrower which also seems contradictory to the “word on the street”. I don’t want to misinform my clients. Can you shed further light on this topic?

  • October 18, 2012

    Hi KC. I’m sorry to hear about those problems. Loan modifications are only supposed to be reported as derogatory if the loan was delinquent prior to going into the TPP (Trial Payment Period). If you’ve never missed a payment on the loan then it should not be showing as delinquent. Here’s the language from the HAMP website FAQs…

    “Accepting a loan modification can affect your credit score, but the actual effect will depend on a variety of factors. For more information about your credit score and how to improve it, visit http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm.

    Each month, servicers must describe to the credit reporting agencies the exact status of each mortgage. If you are current with your mortgage payments prior to the trial period and you make each trial period payment on time, your servicer must report you as current and also identify the loan as “modified under federal government plan.”

    If you are delinquent (at least 30 days past the due date) prior to the trial period, your servicer must report the level of delinquency and also identify the loan as “modified under federal government plan.”

  • October 18, 2012

    Hi Kevin. I don’t think your experience contradicts my article. The ability to get a new loan is different than the impact on a credit score of a short sale, right? We’re talking about two different things. My piece was about the impact to someone’s score of different mortgage events rather than their ability to get loans after a short sale. Thx, John

  • October 18, 2012

    John, I appreciate the site and your candor. I have a condo in MD that I purchased in 2007. I have never missed a payment or been a day late. I am currently renting it out but am still about $750 upside down every month. I just left the Navy and have a fairly good job in Arkansas, but it is still (for the next year or so) a fairly significant pay cut. I am in the process of purchasing a house here. My current lender (on the condo) has offered a 4 month forbearance, but it is going to be woefully inadequate. I’m seriously considering just giving up on the condo because after I buy the new house, I won’t need “serious” credit for a while. My wife is terrified at me “ruining” my credit but I honestly don’t care (figuratively speaking) because I know it can rebound. Am I way out of line? I’ve been a great customer and feel like if they aren’t going to help me than I’m not as pressed about it. Having said that, would it be very difficult to buy a new car or something like that after the fact. I don’t need one immediately or anything, my FICO is currently around 740.

    Thanks again!

  • October 19, 2012

    Thanks Mike and thank you for your service to our country. What you’re contemplating is called a “Strategic Default” meaning you can continue to make the payments but choose not to do so. I’m not the credit police so I’m not going to advise you one way or the other but I would suggest that you do some research with a real estate attorney before you let it go. Different states give mortgage lenders different options to chase down defaulted mortgages. In some states lenders can foreclose but cannot chase you down for the deficiency balance. However, in some states they can sue you for the deficiency balance (the difference between what you still owe versus what they were able to sell it for). It’s not as simple as walking away and you’re done with it. Read this…

    http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt144.shtm

  • Cyndy
    December 2, 2012

    If I do a short sale on a rental that I’ve not been late on do you think my other credit card creditors will increase my interest rate?

  • December 3, 2012

    Hi Cyndy – Thanks for your question. If you short sell your rental property it will likely show up as a settlement on your credit reports. That will not be a secret and your credit card issuers will likely know about it within 30 days. Most credit card issuers pull credit reports and scores monthly to see if your credit risk has changed. If the settlement has lowered your FICO scores enough to concern them then yes, they can take adverse action against you. That can include lowering your credit limit, increasing your interest rate or closing the account altogether. If they take these actions based on information in your credit report then they have to send you a copy of that report AND the actual score they used from which to base their decision. This is called a notice of adverse action and it can be sent in the mail, via email or given to you verbally.

  • Jose Colon
    March 6, 2013

    Hi John, I really need to ask you just one simple question. My partner and I are fixing our credit for almost 2 years. We now planing to buy a mobile home, until we get our credit excellent. right now our credit indicate that we qualify for a home. My question is…I have one delinquency which it should be out of my credit score next year, but we can’t wait another year renting. It is possible I will be put down because of one simple delinquent that is already been paid? Beside, the place we want cost no more then $35,000, which is what we want for now till we can own a better house. We have the down payment and closing cost, but again…will I be decline because of my one delinquent? I’m hoping not, because rent keep going up and up and the amount we paid can be put up for a mortgage. Can you please help me here…what should I do.

  • March 8, 2013

    Hello Jose. I’m not an underwriting but if that one delinquency is old, paid, or minor then your credit scores might be pretty strong at this point. Why don’t you ask the lender to prequalify you for the loan? They’ll pull your credit reports and scores and can tell you if you’d qualify for a loan or not, and at what interest rate.

  • JL
    March 11, 2013

    It’s kind of hard not to miss payments when most banks require you be behind on payments to qualify for a short sale approval. I have 0 debt and have never had anything negative on my credit report until my short sale. 120 days delinquent and “settled for less than agreed”. Score went from 820 to 673.

  • March 14, 2013

    I’m sorry to heat that, JL. Look at the bright side…you’re no longer underneath a bad mortgage…and your credit score will heal over time.

  • Dennis Hull
    April 12, 2013

    John, I have a strange situation in which my second mortgage holder (Goldman Sachs) approached me to pay my loan off at a discount if I would do it within a 45 day window of their offer. The offer was very attractive so I quickly put together a VA refinance and wrapped the payoff into my new mortgage. There was never a mention of “short sale” or any other derogs to my credit score. Now, two months later I find out that the mortgage servicer that processed the payoff tagged me with a “late payment” and a “short sale”. on my credit report. Up until that time I had made all my payments on time with the intention of continuing to do so (until they made the offer).All my accounts were current and in good standing and there was never a hint of any foreclosure problems. I have no clue as to Goldman’s motive for this action… but I do know it was their offer and their terms and I paid them the discounted amount accordingly. I contacted the loan servicer and they are holding firm to the “short sale” definition. Any suggestions on fighting this?

  • April 12, 2013

    Hi Dennis. Thanks for your comment. Any forgiveness of a portion of a loan amount is considered a settlement, which is what a short sale is. So, I don’t think you have any ground for an FCRA or any sort of credit related action, although I’m not an attorney so keep that in mind as you read my advice. Whenever you’re dealing with credit reporting issues you have to ask yourself…”is what’s being reported an accurate reflection of the status of the loan?” If the answer is yes, then no credit reporting issues. If, the answer is no, then you may have an argument. Review all of the paperwork and communications from the lender to see if there was ANY indication at all that taking advantage of their offer would result in potential credit damage. If not, then you may want to speak with an attorney to see if withholding that information is grounds for action on your part. Certainly lenders are well aware that settlements are considered negative.

  • Heidi
    April 21, 2013

    I just closed a shortsale on the home my former husband and I had owned together. He stopped making payments 8 months ago. My car has extremely high mileage and is costing me too much money in repairs. The delinquent mortgages are my only credit ding (plus using about 80% of my credit card allowance, thanks to repairs. What can I expect around financing? I would like a reputable used car. Rates, amounts? How quickly can I expect to be approved on something reasonably decent?
    Thanks!

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