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 they 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 Fannie/Freddie have agreed that 2 years after a short sale, they will consider home loans for good credit risks. The other interesting thought is – how can the banks and FICO keep the same scoring system when thousands of homeowners have had to either short sale or foreclose their home? I think there will be a new scoring system to take into account the difference between a foreclosure and a short sale. Otherwise there will be many people who cannot get a loan and banks that want to make money. It comes down to commerce!
Don’t get in too deep – call us for help on determining your options with a short sale, we can help.