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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.

Mortgage Research chart-1 
Mortgage Research chart-2 

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.

If you have questions about this research, I encourage you to post them here on the blog.

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Comments

John Ulzheimer

Thanks for again confirming that short sales are no better for your credit than foreclosures. Still, you'll have people who will look at this and say "see they're better."

Laurel Starks

Interesting that the existence of a deficiency balance impacts the score. While foreclosure may have similar affects to the score that the short sale w/ deficiency balance has, it should be noted that many lending institutions will not lend, regardless of score, with a foreclosure within 4-7 years.

Brian Sharp

FICO score is not the only consideration when you are comparing foreclosures and short sales. You can qualify for most home loan financing within 2-3 years after a short sale. It can be 3-7 years after a foreclosure. In addition, the current standard residential loan application asks whether you have EVER had a foreclosure. It does not 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.

Steven Pawera

Saying there is no substantial difference in damage to a credit score between a short sale and a foreclosure isn't entirely accurate.

A short sale undertaken early enough allows the borrower to mitigate a lot of damage e.g. not have to necessarily miss mortgage payments. And short sales can and are closed without missed payments. The borrower's default need only be 'imminent'.

Is it not the 'days late' on the mortgage history that is the prime factor in the degradation of the FICO score? 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 (exempting perhaps quick foreclosure states like Texas).

Arna Freedman

This article does not mention the impact on your job. If you complete a foreclosure and you have to pass a security clearance, you will loose your job. In this case a short sale is a better choice.
We just got notice from a Very Large bank that has a large foreclosure inventory. They are going to be running credit reports on their Broker/Agent network and if the Broker/Agent has lost their home to foreclosure or short sale, they will no longer be able to handle the assets (foreclosed homes) for them.

Joanne Gaskin

It's true that the FICO Score places significant weight (typically about 35%) on payment history. So delinquencies do have a significant impact on a consumer’s FICO score, as noted in the research results. Lenders typically report a short sale as a settlement for less than the full amount due. In terms of credit risk, such a settlement is a loan default. When our scoring model assesses a derogatory loan on a credit report, our model focuses on three dimensions: recency of the nonpayment, severity (how long overdue is the payment), and frequency (how many accounts have been reported delinquent). Clearly a loan default is the most severe type of delinquency whether it takes the form of a short sale, foreclosure or deed-in-lieu. That's why, once the short sale has posted to the credit report, the presence (or absence) of prior delinquency on that loan does not have a significant influence on the score. As noted in our post, the take away is there is no significant difference in score impact between a short sale and a foreclosure.

Commercial Mortgage Refinancing

There are a lot of things to be considered when comparing both.Foreclosure is a word that is taboo with a lot of lenders.

shizo

What I see is a tilted playing field. Correct me if I am wrong, but why is the magnitude of fall greater, and the time frame of "pain" longer for the higher end score? Seems to me that it makes more sense to give a break to those that have a better track record...?

Naw (silly rabbit), this is designed to break those that have the most to (theoretically) lose.

harrysteed123


The market rates may have gone down, or remained the same. For the homeowner to get qualified for lower rates, there are certain prerequisites but I would recommend you search online for "Mortgage Refinance 123" before you decide because they can find the 3% refinance rates.

Howard Bono

This is not a zero sum game. All of the foreclosures that are yet to come will create a backlog that the banks absolutely will not be able to handle. There is no way that the banks can afford to eliminate this huge group from buying again as quickly as possible. The credit rules as they exist today will have to be changed so the banks can sell these properties. You cannot eliminate 15 million former homeowners for 7 years and expect the housing market to recover and the banks to stay solvent. The banks will make these changes for their own survival.

James Earl

Thanks for posting this useful information. Most Americans are clueless as to how their credit score is determined.

Frank

Given that FICO's scoring model is secret, and could change on a dime tomorrow, how useful is this study?

Steve Larrimore

I have been told that while there has been some success reported in having first lienholders waive deficiencies, subordinate lienholders tend not to do so and frequently require a note be signed.
Would the deficiency left from a 2d have the same impact as if the first mortgage had one as well?
Would having both a 1st and 2d being foreclosed or settled by short sale impact the score more than just a first?

Joanne Gaskin

Thanks for your interest, Steve. I’ll answer each question separately--

Would the deficiency left from a 2d have the same impact as if the first mortgage had one as well?
For purposes of this study, we assumed a sizeable deficiency balance being reported on the first mortgage. Assuming the deficiency balance reported on a subordinate lien was similar in magnitude, then the FICO® Score impact of a deficiency on a 2nd would essentially be identical to the impact of a deficiency balance reported on a first mortgage.

Would having both a 1st and 2d being foreclosed or settled by short sale impact the score more than just a first?
The number of unsatisfactory accounts in a consumer’s credit file is a common factor used in the FICO® Score calculation. As such, having two accounts (both 1st and 2nd) reported as foreclosed and/or settled by short sale instead of just one account reported as such could have a more negative impact on the FICO® Score.

Alison Nicklin Shuman

I think Howard's comment is interesting - at some point the banks are going to have a TON of houses and no one with the FICO scores qualified to buy them. At that point, someone will realize that some tweaking is necessary.

mortgage consultant

The sale is directly proportionate to the score I think. The higher the sale, the higher the score. The lower the sale, the lower the score too.

John Youker

Well, I would somewhat agree with your analysis here, however, I have to say that most people I am dealing with are so far gone on their credit and bills, and are delinquent on just about everything, so the starting score is pretty low. Also, I am practicing in a deficiency state, thus causing the seller to be responsible for deficiency balances resulting from short sale or foreclosure, and many times the deficiency is MUCH lower on a short sale than a foreclosure. Also, keep in mind that the old trick of foreclose, wait for deficiency judgement, then file BK will not work in Indiana, as you can not strategically plan out how you will "get out of" owing the money back to the bank - it can not be included on the BK, after the fact. So, I guess it is just a matter of opinion on what is the best route. If you are a BK attorney, that will be the best route, if you are a real estate broker, then short sale may be the best route, much like if you have a plumber come to your home, you are going to need plumbing work completed. I guess that each situation is different, and that is how we view it. I have turned down many short sales as I feel it is not in the best interst of the client to proceed with a short sale - however, I have taken many that it was the best route to go. Foreclosures not only are worse than a short sale much of the time, they are also bad for the community, the economy, and all of our futures in this industry.

Ken Smith

Regarding the charts in this post: If a home is sold as a short sale with a deficiency, but the lender reports the sale as “paid in full – paid as agreed” or “paid – settled”, does the seller fall into the “no deficiency balance” or the "deficiency balance: category? Thank you!

Joanne Gaskin

Thanks for the question, Ken. If the loan is reported as paid as agreed or in full by the servicer (no amount left owing reported) then this would be categorized as "no deficiency balance."

Greg Pennington

It was my understanding that there is no specific code for short sale under Metro 2… I know the account status codes and payment ratings for foreclosures and Deed in lieu of foreclosure… what are the specific account status codes and payment ratings that designate a short sale?

Specifically, What are the specific account status codes for “Short sale/deed-in-lieu/settlement (no deficiency balance) and “Short sale (with deficiency balance?

Do special comment codes in the Metro 2 format, though not shown on the credit report, effect the credit score as well as the account status code?

You answer in one of the questions of the post “…Lenders typically report a short sale as a settlement for less than the full amount due.”… how is that reported specifically in the Metro 2 format sections under account status code and payment ratings?

Joanne Gaskin

When it comes to data reporting issues, we recommend lenders work directly with the credit bureaus or the CDIA to ensure accuracy with Metro 2 reporting guidelines. The CDIA website also lists upcoming webinars that may be useful: http://www.cdiaonline.org/Metro2/content.cfm?ItemNumber=853&pnItemNumber=506

Anthony Bass

Credit recovery:
We have 2 options on a fraudulent loan:
1. Give in to get on with our lives and accept a $500,000 deficiency judgment.
2. Prove in court the multiple counts of fraud.

If we do prove the fraud, what use is that proof in restoring our credit after 3 years of non-payments? IE---how will it help?

Thank you.

John

If one is successful in negotiating a short sale/short payoff by having the lender report "paid in full" and pays the deficiency in an agreed upon promissory note. Would the seller be eligible for a new mortgage immediately, since nothing on the credit report would indicate a short sale occurred?

Greg Pennington

I think when you answered Ken Smith's question on 5/9/2010, you delved into the area of proper reporting and what options a consumer may have in negotiating how the data is entered by the lender upon finalization of a short sale. I write about this in my blog here:

http://gregpennington.com/2011/05/13/why-a-short-sale-may-be-better-than-a-foreclosure-on-your-credit.aspx

No need to post this if you don't want, but I would really appreciate your input.

Mark Moore

I didn't see this asked: in the analytics, did the 3 different class of borrowers (A, B, C) have mortgages in the 3 (or 7) years your report said it takes them to recover their credit score after short-sale/foreclosure (but not bankruptcy)?

Was there any break-out about whether their ability to secure a mortgage and service it accelerated their credit score rehabilitation?

Joanne Gaskin

Mark: No, the effect of new mortgages during the time period was not part of our study. The research assumed everything else was held constant on the credit file. This was specifically done to isolate score impact and time to recover of a foreclosure, short sale, etc.

Reema

This is interesting ..
But .. Does paying the installments ahead of time improve the score ?

Giang Hoang

It appears as though for short sale, foreclosure, and bankruptcy, Consumer B's scores are more deeply impacted than Consumer A's, e.g. for BK, they go down to a lower limit of 525, vs. Consumer A's lower limit of 530. Is this correct?

Rachel Bell

Reema: Prepaying mortgage installments ahead of time will not improve the score.

Joanne Gaskin

For these two specific cases, yes, the short sale, foreclosure, and bankruptcy have the potential ability to result in a lower score for consumer B. In general, the impact to score from any event is dependent on the specific information on the trade line in question, as well as the other information on the credit report. Please remember that this study used select consumer credit profiles to provide insight into general trends to score impact from various events. Given the wide range of credit profiles that exist, results can vary beyond what's in the charts above. More importantly, one of the key takeaways from this study is that the impact to score is highly dependent on the starting score – higher scores have farther to fall when negative items appear on their credit report.

Stanley

I have a question - suppose I start defaulting on my mortgage while I try to short sale my home. If the lender reports both incidents (the late mortgage payments AND the short sale), will my credit necessarily take both hits? If so, will it

a.)go down sequentially, so that, if I had a score of 780, I get dropped to 650 for late payments and THEN get dropped another 100 or so b/c of the short sale

or

b.) go down at one time, so that, if I had a score of 780, the combined loss would be 160+130 = 290 off 780.

I ask b/c the order does matter since if one initially has a low score, the hit to the credit of a short sale is less severe.

I don't want to be late on my mortgage payments, but BoA doesn't even want to talk to anyone who isn't late on their mortgages, even if there is financial hardship.

Also, can someone talk a bit about recovery time to credit after a short sale or foreclosure? I don't ever want to buy a home again, but I do want to rent an apartment.

Blog Moderator

Since this is a blog for bankers and those following the industry, we recommend that you check out the myfico.com consumer forums at http://ficoforums.myfico.com/ for questions about your individual FICO Score. It's a great place to post questions like yours and to get credit scoring advice.

Premier League Results

The first chart shows indicates score for each stage of delinquency, and the second indicates how long it takes the score to fully “recover” after the fact.

----------------------
Stepen

Cody

Question, Joanne:

In my scenario we have two rentals. One we recently refinanced to a low rate, that cash-flows well. Another property, for certain reasons, we are not able to refinance, eats $500 a month and is under water. If we short sale the bad property, but keep all other accounts and tradelines open and paid off, how would that translate into recovery of your score? Would it help recover faster? Thanks for your help.

Blog Moderator

Cody: Thanks for your question. Since this is a blog for bankers and those following the industry, we recommend that you check out the myfico.com consumer forums at http://ficoforums.myfico.com/ for questions about your individual FICO Score. It's a great place to post questions like yours and to get credit scoring advice.

Selina Davis

Mark: The fine print under the graphs indicate that the estimated recovery time assumes no new account openings duing the recovery period - in other words, no new mortgages after the event in question. It also assumes that all else remains constant.

Selina Davis

Joanne: Two questions:

1. Does the study treat a Chapter 13 reorganization the same as a Chapter 7 bankruptcy?

2. Does debt-to-income ratio impact the FICO score? I suspect it must, if the general score is meant to evaluate the risk that a prospective borrower might fall 90 days behind on the debt at some time. If so, at least one variable is likely to improve for the vast majority of consumers who are currently experiencing financial distress due to job loss and/or underemployment, as their fortunes will likely improve in a few years (or sooner) when the economy truly begins to rebound (particularly if they discharge their debt in bankruptcy, and/or if, as assumed above, they remain current on their other obligations.) This would, in turn, imply that those individuals could anticipate a more rapid recovery of their credit score than estimated above, which would obviously depend on the weight debt-to-income has on the overall score.

pete scalise

what is the effect of a loan modificatiion wherein the loan balance is reduced or
cancelled?

thanks

Joanne Gaskin

Selina, thank you for your questions. To respond to the first question, the delinquency study was not designed to study bankruptcy in detail, so there was not a special emphasis placed on understanding the differences in Chapter 7 vs 13 bankruptcies. However, the “time to recover” from bankruptcy is listed as around 7-10 years because discharged Chapter 13 bankruptcies only remain on the credit file for 7 years, whereas other types of bankruptcies can remain on file for up to 10 years.

For your second question, FICO Scores do not consider “debt to income ratio” as the FICO Score does not consider income. Instead, the score uses data that is found in the credit bureau report to predict the likelihood of repayment over the next 24 months. For more information on the FICO Score ingredients, please visit the following educational web site: http://www.scoreinfo.org/FICO-Scores/Score-Ingredients.aspx. You will note that payment history and amounts owed are the most significant factors in a consumer’s FICO score.

Joanne Gaskin

Pete, the effect of a loan modification wherein the loan balance is reduced or cancelled depends on how the loan modification is reported to the credit bureaus. If the modification is reported using the new comment codes recommended by the CDIA for the federal government or lender-sponsored modification programs for distressed borrowers, there is currently no impact to the consumer’s FICO Score. FICO is continuing to study the performance of these modified loans to determine future treatment.

CarlMortgage

how would that translate into recovery of your score?
they remain current on their other obligations.

James

What happens if you close on a short sale (no deficiency) where last mortgage payment was not made (all prior were) but the closing is on the 20th day after payment due? In other words, you close before ever being 30 days late. I assume in this case being late would not matter as it was not more than 30 days. Any thoughts?

Joanne Gaskin

James: the FICO Score can only consider what a servicer reports to the credit reporting agencies. This includes payment status such as on-time or late payment, or a short sale. As noted in the research, both a late payment and short sale will have a negative impact on a consumer’s FICO Score

Ed Clements

I think your numbers are way off. If it only takes 3 years to recover to 680 FICO then it should only take 3 years to recover to 780. Especially since Sort Sales are being factored into the equation.
I have a friend who filed BK7 and 2 years later was in the 750 range.

Laurie Robinson

My current FICO is 900. This chart tells me that a foreclosure wouldn't ruin my score. Am I misunderstanding? Is it really not such a bad idea to let the house go?

Dennis

What if a person files BK and then defaults on a mortgage? Can you see just how long it will take to get another mortgage?

Joanne Gaskin

Hi Laurie,
Please note that the FICO® Score range is 300-850, so if you purchased a credit score of 900, it would not be a FICO Score. You may find it useful to visit www.myfico.com for in-depth educational information on credit scoring, and you may also securely obtain your FICO Score on the site. Foreclosures and other mortgage delinquencies impact all FICO Score ranges, and in general, the higher the starting score, the longer it takes for the score to fully recover. The impact to score and time to recover from foreclosure is significant and should not be taken lightly.

It's important to remember that this study used three consumer credit profiles to provide insight into general trends to score impact from various events. Given the wide range of credit profiles that exist, individual results can vary beyond what's in the charts above.

Roger

I assume in this case being late would not matter as their fortunes will likely improve in a few years.

Evan

Hi Joanne,

So my situation is...

-House is worth $375K.
-I owe $310K to B of A - my first
-I owe $187K on my second with Chase.

Basically, I'm about $120K under.

I have no late payments yet at all with Chase. I want to preserve my credit score and have the ability to buy a house whenever I want, so I tried to settle w Chase for $40K, and they said they'd accept nothing less than $70K. Credit report would say "settled as agreed," but it would not have any lates on it. (Since 2nd would be gone, I would make $60K back when I sell the house.)

In summary...

SHORT SALE - Costs me $0, but I have to wait 2 years to buy a new house.
SETTLED W/O LATE - Costs me $10K in the end (-$70K + $60K upon sale), but impact on credit score is minimal and I can buy a house immediately.

Is the above correct? I guess my main question is - if I'm not late, but Chase still settles, what impact does that have on my credit score and how much better is that than just short selling? Will I be able to buy a house immediately if settled without late?

My accountant also said I would not have to pay the 1099 for the fantom debt due to some clause. If you know otherwise, please let me know.


Thanks for your time,

Evan

blog editor

Thanks for your question. Since this is a blog for bankers and those following the industry, we recommend that you check out the myfico.com consumer forums at http://ficoforums.myfico.com/ for questions about your individual FICO Score. It's a great place to post questions like yours and to get credit scoring advice.

Jesus_Messi

This is good post.
thanks for sharing.

Appraiser Bob

I personally went through a foreclosure on an investment property. I took about a 200 point hit on my fico after the process was totally done (180 days late + foreclosure). However, my credit score was above a 700 within a year. All I did was continue to pay bills on time and pay off one of my three credit cards while keeping the other two below 30%.

iwillteachyoutosave.com

Responding to an earlier comment. You can't lose your job because you went through a short-sale.

Plumber Edmonton

It is very essential to remind that this part used three consumer credit profiles to bring into usual trends to score effects from different events and provide the wide range of credit profiles that exists, each results can vary beyond what is in the part above. Plumber Edmonton

Michael Bluem

I appreciate you for such great post.I got a lot of informative material from this post.

alex

Short sales should be treated a little different then foreclosures. After all the homeowner is taking responsibility in of the those scenarios.

mortgage service

I never know that the FICO score could reach 900 until I saw Laurie's comment here. As far as I know, 850 are the highest so far. Is this possible to have a FICO score this high?

Student With Mortgage

My question is around recovering from both a mortgage and student loan deliquencie.

So if someone were in a situation where they got behind on both their student loans and their mortgage than were forced into bankruptcy.

It is my understanding that the mortgage debt may be forgiven through bankruptcy but the student loans wouldn't.

So would the student loans continue to be an "anchor" on someones credit score coming out of bankruptcy?

Jill Richardson, FICO

Student With Mortgage:
Bankruptcies can be factored into your FICO® Score as long as it remains on your credit report. Some types of bankruptcies can stay on your file for up to 10 years, although the impact from a bankruptcy can lessen over time. As long as you continue to pay off your student loan per the terms of the loan, it should not be “an anchor” to your credit score.

short sale

Can you suggest me which is better, short sale and foreclosure. also define how to Save Your House ?

Rex

If I do a short sale now. Will I have to pay IRS taxes on the property?

Refi Rancho Mirage

thanks for sharing this information ... it is very useful for me.

John

Thank you keeping us updated. Most of us are not aware how this is determined. However, transparency like this should be determined and posted once in a while for the benefit of many people that rely on you.

Dave

I'm curious to know if this study has been updated since 2011. We've observed some credit profiles that call some of these score estimates into question. We've seen credit files with recent derog mortgage history still scoring in the mid to high 600s.
I'd appreciate anyones feedback.

Joanne Gaskin

Dave: Thank you for your question. We conducted this study on select consumer credit profiles to provide benchmarks of score impact from mortgage delinquencies holding all else constant on the credit file. Given the wide range of credit profiles that exist and the fact that a consumer’s credit file tends to not remain constant, results may vary from what's shown in the charts. For example, consumers can pay down their revolving debts resulting in a lower utilization ratio and may see their FICO® Score improve.

Samson

Why do they use the term "delinquency"? And does that refer to illegal action taken, or lack of living up to the agreement for a mortgage? Do these numbers reflect the kind of mortgages taken by plumbers in Edmonton or just those in the US?

Jamie @ Degree Source

This is certainly a very helpful post. At least we can be more aware of how our financial delinquencies can affect our FICO scores. Indeed it's very important to just plan ahead in order to avoid such ordeals. You never know when a good FICO score will come in handy. What if at that time, it's at its worst and there are still a few years left before it can fully recover?

When it comes to student loans, the same principle applies so students should also be careful about the payment of mortgages. After all, you don't want to begin your adult and independent financial life on the wrong foot.

MtgQuant

Likely a logical flaw in the 3rd sceanrio for a customer with 780 fico...

Before Foreclosure, customer goes through necessarily delinquent stage. i.e., a 90day mtg late that would have brought fico down to 650-670 (& probably worse as delinquency increases and persists before fcl)
"THEN" Fcl hits. (i.e., you're a Consumer A, 1st column) & post FC end up with a 565-595 score...The most plausible sequence...unless I'm missing the framework of this simulation.

Jim Fox

Can anyone help me understand from the table above, why if your credit score starts out at 720 your score in a short-sale or foreclosure falls farther than someone who starts out at 680? Aside from being counter-intuitive, it goes against what happens if you were to start out at 780.

Frederic Huynh

Jim: these results consistently show that higher scores “fall” farther after the negative item appeared on their credit report. In other words, those scoring 780 fell a bit further than the 720 group, and those scoring 720 fell a bit further than the 680 group. Why? Take, for example, consumers with very high FICO Scores. A key reason why they receive such high scores, in all likelihood, is that they do not have historical delinquencies on their credit reports. Let’s say someone with a 780 goes through a short sale. The presence of a derogatory indicator on the credit file, such as a short sale, can have a material impact on this person’s score because now the file shows a very recent negative event. Contrast that to a consumer with a moderate score, say a 680, who is more likely to already have the presence of a mild delinquency on the file. A short sale will still impact the person’s score negatively because it is a recent severe derogatory, but since there was previously negative information on the credit file, the score impact would likely not be as great.

loan mortgage company

Thanks for sharing this information its really nice.

lauren jonczak

Great information. My boyfriend just had the hardest time trying to get a mortgage. He finally found a company that stays true to their slogan Bank Says No! We Say Yes!. I however don't know much about mortgages so I have been doing as much research as possible. Wow, 7-10 years for your score to fully recover is a long time. Thanks for sharing!

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