THE BASIS POINT

How Do Mortgage Lates, Foreclosures, Bankruptcies Impact Your Credit Score?

In the past week, we’ve seen promising economic and home price data, but many homeowners are still strained to the point where foreclosure is inevitable—or perhaps “viable” for those deeply underwater homeowners considering strategic defaults. So the often repeated question is: what do late mortgage payments, foreclosures and bankruptcies do to your credit score? A couple weeks ago, Les Christie at CNNMoney did a great job of answering this question, and since the story got a bit lost in the SEC/Goldman Sachs lawsuit hysteria, we just wanted to highlight it again.

Excerpted below are some estimated credit score hits a borrower would take by being late on their mortgage, and eventually going into foreclosure and/or bankruptcy. These are based on models from Fair Isaac, one of the three major credit bureaus … in other words, these aren’t real consumer scores. But it’s still a useful ballpark for debt-strained consumers who need scenarios of what might happen to their credit score. Every profile will be different based on overall credit profile, and the recovery time to get back to a favorable score vary based on credit history prior to the derogatory filings. Derogatory reports remain on the credit scores for 7 years (and in the case of bankruptcy, it’s 7 years from the time of discharge), but if an otherwise top-tier credit score consumer is hit by default, foreclosure or bankruptcy, their score can rebound in less than half that time if they resume a well-maintained credit profile immediately.

Recently, 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 hit 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

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.