How Bad will a Foreclosure Affect my Credit?

If you’re delinquent on your mortgage, your credit score will suffer.  Everyone knows that.  The question is, by how much?

Until 2010, 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.

Back in 2010, 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 hits 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

The lending industry tends to regard an account differently when it has become 90 or more days late.   The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days.

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.  If you picture someone who has just one mortgage and one other credit account versus a mature credit user with 15 accounts, if they miss one payment that would impact their scores a lot more.  For the more established user, 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.  Of course, it just gets worse when you face foreclosure.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor 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.

Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, the worst thing that can happen to your credit score.  The effects are long-lasting.  In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove.  A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

Absorbing a big credit-score hit can make many transactions more costly.  It’s not just paying more for credit card debt and auto loans, insurance can cost more as well.  The average savings for someone with a good versus mediocre credit score is about $115 a year for auto insurance and $60 for home.

A low credit score can even make it harder to rent a home because landlords often use credit scores to weed out prospective renters.

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