THE BASIS POINT

Credit Score Impact & Recovery Time For: Late Payment, Foreclosure, Short Sale, Bankruptcy

The folks at FICO Labs are coming out with a new way to predict the likelihood a borrower will default, even if they can afford their mortgage.

Predicting strategic defaults is the goal, with a strategic default being where borrowers, who can afford their monthly mortgage payment, opt not to pay it – often because they owe more on the home than it is worth.

FICO Labs believes that the strategic default borrower is one with a reputable credit score, low levels of revolving credit, little retail balance and a short occupancy in their current residence. By these characteristics, the strategic borrower is money conscious, has a low probability of past defaults and has little attachment to their property.

FICO reports that borrowers whose homes lost the most value are only twice as likely to default as those who lost the least value.

And just how much impact does a short sale or foreclosure have on FICO scores? Apparently the magnitude of the impact is highly dependent on the starting score, but there’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure. See tables above for details, and here’s a full report.