Truth in Foreclosure

Thanks to The Real Deal for this lead…

Someone Finally Did a Credit Score Study!

Everyone’s heard of Fair Isaac’s, of course…they’re the folks behind the wonderful FICO credit scores we all hear so much about.  But did you know there’s a new system coming out that’s going to replace FICO?  It’s called a VantageScore and is now being used by more and more lenders every day.

The three credit bureaus (Equifax, TransUnion, and Experian) have formed a partnership to develop the VantageScore and think that it better represents an accurate representation of your likeliness to repay a debt better than FICO scores do.  But we’re not here to talk about the VantageScore.

This partnership just finished up a study of over 400,000 credit files to see what the impacts of different foreclosure workouts are.

How Much Does a Loan Modification Hurt My Credit?

The study found that if you had excellent credit before the modification, the negative impact to your score would be minimal…typically about a 30 to 40 point drop.  even if you had to defer your mortgage payments for 3 months!

And if your lender writes down your mortgage balance and chooses not to report the writedown as a chargeoff, you could actually see an increase in your score! About 10 to 30 points.  I know…unbelievable.  It’s because you have less total debt and your debt to income ratio won’t be as high.

Even if your lender recapitalizes your past due payments into the loan, you could see a minor increase in score too…according to the study.

Credit Score Impacts for Short Sales, Foreclosure, and Bankruptcies

Short sale – typically about a 130 point drop.

Again, all of these assume you’re starting from excellent credit.

Foreclosure – about 140 point drop.

Bankruptcy – approximately 365 point drop!

Obviously, you should avoid bankruptcy if at all possible.  The reason for the huge difference is because short sales, foreclosure, and modifications only affect one or two accounts.  A bankruptcy, on the other hand, affects all of your credit accounts.

I’ve had a lot of questions about this, so I hope this helps you figure out what to expect.

My Own Short Sale Experience

With my short sale, I’ve seen about a 80 to 90 point drop from the 750s down to the 660s or 670s.  We missed 9 mortgage payments but paid all of our other debt payments on time including the mortgage on our primary home.  The drop in my wife’s credit score was about 10 points less than mine for some reason.

Of course, I don’t know if it’s bottomed out yet.  The sale just closed on March 31st, so the score might go down a little more once the short sale is recorded.  I hope not, but we’ll see.

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