It is pretty much understood, that if in foreclosure or going through a short-sale, credit scores are going to take a hit. What has not been clearly understood ... is just how much of a hit is felt? Until recently, there had not been much of a barometer or "method" known for calculating or determining how these delinquencies would affect a FICO score. Fair Isaac has recently revealed a little bit of information as to how they calculate that.
Explaining the five components that make up a FICO/Credit Score might prove helpful here. If they are known, the results of foreclosure, short-sale, and bankrurptcy will be better understood.
First and most importantly ... there's Payment History. Using this, FICO calculates future risk by studying past history of payments. This important portion of the calculation equals a full 35% of the total credit score. Credit card payments, student loans, mortgages, and the like are considered here. In a nutshell, make your payments in a timely and consistent fashion, this portion of your score will remain healthy.
A borrower's total outstanding amount of debt accounts for 30% of their score. There are sub-components found within this accounting of debt. A revolving line of credit will be weighed more heavily than an installment loan.
Example: Credit cards are revolving lines of credit. Credit cards have limits placed upon them. If you're balances on your cards are high and close to maxing the cards out ... this portion of your overall score suffers. This type of credit is taken into consideration more heavily than a car loan, which is an installment debt. In FICO's mind, a borrower with high credit card(s) debt is a poorer risk for future debt because they've shown tha
t they cannot handle their debt and spending in a responsible manner.
Next, making up 15% of the total credit score ... is the length of a borrower's credit history. Taken into consideration here is the length of time an account(s) has been open and the length of time since the account has most recently seen action. This is where it actually pays-off to have had some type of credit and not being paying by cash or check. The lengthier this history is, the more insight FICO has into the historical behavior of a borrower regarding how they handle debt.
(This also explains why a lender may ask a younger borrower for further documentation of finances/debt ... or even recommend that they open a credit card/line of credit. It gives them a "track record" for FICO to follow.)
Opening too many lines of credit can be damaging though. This remaining percentage of the components of your FICO score (10% and 10% each) are actually a mixture of new credit and the "mix" of your credit history.
To make the explanation of this easier, I've always likened a credit score to a "story". For some borrowers that story is a full-length movie ... for some it's a short skit. Open too many lines of credit and you run the risk of your "story" appearing like a long-running movie with a number of sequels ... movies that are filled with financial troubles, melodrama, and risk-taking. Simply put, FICO isn't going to like it. To get a five-star rating ... your story must flow smoothly, have perfect timing, and be low drama. Payments must have been made on time, never late ... and your credit card balances should be low.
It's important to point out here, that if you have a number of credit cards now ... do not think of closing or canceling the cards out. Pay down the balances, use them infrequently just to keep them active and then payoff the balance charged immediately. Closing the account out could actually harm your score, as it shortens your credit history.
For those that are presently facing the trauma of a short sale or foreclosure ... how does all of the above play-out on their scores? Where are those scores as they try to move forward financially?
Using the guidelines recently given by FICO, here is an estimate as to the impact o
f differing levels of delinquencies:
30 days late: 40 to 110 point drop
90 days late: 70 to 135 point drop
Foreclosure, short sale, deed-in-lieu: 85 to 160 point drop
Bankruptcy: 130 to 240 point drop
As you can see, as the delinquent payments become more serious, the point drop in score becomes more dramatic ... but for even one late payment the penalty in score is fairly severe. And unfortunately, the effects of late payments on credit scores is long-lasting.
It's easy to lose points ... hard to regain and re-establish them. It truthfully can take years. A homeowner that knows they are in credit jeopardy needs to communicate and work with their lender as quickly as possible. Forego the embarrassment and get help. If the problem has moved beyond that point, they then need to assess their financial damages and forget their credit scores. They cannot afford to let the scores rule
them and keep them from doing whatever they must for themselves and their families.
The sooner the decision is made to short-sale or foreclose, the sooner they can start to rebuild their lives, their financial health, and their new improved credit scores.
Gene Mundt, Sr. Vice President
Personal NMLS #216987
The Federal Savings Bank
1823 Centre Point Circle, Naperville, IL 60563
Skype! 630-219-1316
Great information on FICO Scores it is good to know not to cancel cards just pay them down. I bet a lot of customer's don't know this.
Pat: Exactly why these blogs prove of such great assistance. Our blogs get valuable and needed info out there to clients ... and to referral partners. Thanks for writing. I appreciate it ...
Gene
It's difficult tryng to decide whether or not to go on and buy that red Corvette that's gleaming in one's eye before applying for a home loan.
David: I've heard that! And .. warned against making that move .. only to have that advice somehow overlooked or forgotten. I guess it boils down to priorities some times ... and just how badly you want a house or good credit. Point made ...
Gene
Hello Gene -- nice to be able to comment again, and let you know we appreciate your information. I've bookmarked this post for referral to buyers. Thanks, Gene.
Lottie! It's great to see your face and comments again!! Isn't this fantastic? We're back in business!! And I'm really glad that you found my post useful. I'm honored that you're keeping it bookmarked ... Talk again real soon ...
Gene
Love it. I'm reblogging.
good stuff to know, thank you.
Gene, thank you for this very insightful explanation of FICO scores and the effects of a short sale. I am certain many will find this information very helpful.
Thanks for the details. This should be helpful to everyone - good and poor credit scores alike.
Thanks Gene, I am reblogging
If you wanted to make a decision between foreclosure, short sale, deed-in-lieu, which one would be better in regards to credit score and recovering from the event?
Clear and concise details - thanks for explaining it so well! It's most important for people to understand your point about NOT closing out accounts because it sounds so counter-intuitive,
Great description . I'm gonna bookmark it and come back later to digest it !!!!
Excellent article Gene. I wrote a similar post not too long ago. It is great information for any borrower to have!
Years ago, my dad worked for Dillards Department Stores. They were one of the first Department Store to implement the new FICO score system in connection with issuing credit cards. It was radical for the time. Today it is standard.
The reality is that numbers have always been used as a rating or evaluating system..from that test score in elementary to school to your credit when making the largest purchase of your life. You will always be judged by the numbers!
Thank you for this beyond excellent post on how something as simple as a number can change your life especially in this new landscape of real estate.
Gene, Thank you for this explanation. While I know there are a lot of variables that play into it, it would be really nice if the FICO Gods would just define what affects what and by how much. Of course, something that simple that would benefit us common people instead of the lenders...
Excellent concise explanation-I will be re-blogging this-thanks.
Me too...had to reblog it...will be using it for training my agents in short sale class. Thanks for great information.
Add me to the reblog band wagon! Great explanation which I would like all my buyers and sellers to read!
Thank you so much for such timely information -this was a great blog!
Gene: Thanks for the great information and congratulations on your feature! Have a nice weekend!
Thank you for the clear explanations. This can always seem like such a mystery to all.
Thanks for such a great, well written, clear explanation. Much appreciated!
Awesome is how I can describe this post! Very informative, and useful for us all. Thanks Gene!
Excellent information, I'm reblogging!
Gene - I have been asked repeatedly about the impact of a foreclosure versus a short sale on the FICO score. I noticed that in that category you have give a point drop range of 85 to 160 points... Can you elaborate a little further? Is there a difference between each of the situations vis a vis point drop? Many thanks for an enlightening post...Cheers Heather
Great post Gene! I'm glad to see our company represented here. I always find that borrowers often don't know that they can greatly improve their scores just by paying down their revolving credit card balances. I've seen borrowers scores improve by 20-50 points just by paying them down to 50% or 70% of their credit limits.
Gene: You have a lot of great information...I am re-blogging for my So Cal audience!
Hey Gene - great post! I'd also like to know the breakdown of penalty for short sale, deed in lieu and foreclosure.
My husband and I pay off our credit cards every month. We use them to pay for anything above $10.00 since it's more efficient (don't have to keep going to the ATM), keeps track of purchases and we get points or cash back on our cards.
However, when we purchased our Scottsdale, AZ townhouse last year, the only blip was that we carried "too many high credit balances". Even though they were paid off every month down to zero, it still gave us a negative tick on our FICO, although I'm not sure how much (our scores were still good).
That is great, useful information Gene. Thanks for presenting it in a clear, concise, understandable way.
-Shari
And I thought reading credit scores was all a matter of shaking chicken bones and throwing them out of a bag.
Gene, this a great primer on Fico scores. I'm savin' it !
Gene,
Many consumers probably don't kow how big a hit their FICO will take for a 30-day late on a mortgage. Great primer for them.
Excellent information, clearly and concisely stated. I will reblog. Thank you.
Gene, Thanks for updating the FICO score estimates.
There is a certan danger quotiing ranges of scores as you know how they are entertwined in the 'story'. Nice way of putting it!
Judy, I'd take a closer look at your report. The 'HIGH BALANCE' issue noted on your report MAY be the particular burueau's priority list (each bureau lists their HOT BUTTONS under your score so that's confusing. The comment mannot relate to your own history. Reports are hard to decipher. Ask someone who knows their stuff to explain yours.
Few lenders and realtors understand how to decipher a credit report especially as things keep changing. I write a blog about credit issues myself: www.netcredit.blogspot.com
Hi Loannetter, since we do have good credit any negative comment was surprising, especially since we don't actually carry balances since they are always paid off. Of course, the credit agency doesn't know if the balance shown at the time of the credit check will be the one we don't pay for whatever reason, so I understand the comment. I did ask my loan officer and she kind of stated what you are saying - it's not that our credit or history was bad - it was just that particular reporting agency's general consensus.
Jane: Glad you found it worthwhile. And thank you ...
Richard: I'm happy you found value in the article. Thanks for writing ..
Connie and Robert: Seems like it's a topic that peaks everyone's interest and attention. Hope this helps ...
Cliff: Appreciate the re-blog very much. Thanks ..
Tim: Will try to address this issue in an upcoming article .. Thanks for bringing it up.
Richard: You're right ... it's one of the most often questioned topics. Obviously an important one.
Gene
Gene this is an awesome article that explains FICO in simple terms. Thank you for this great post!!
Gene,
Thank You for the breakdown of the several areas. It will help us when we speak to new listings and Buyer's who have had these scenarios in the past. As we know in the next five years the foreclosure/short sale/bankruptcy in the past history will be more common than we think for future home purchases. We will be re blogging also.
Michael: Thanks for the re-blog. I appreciate the effort.
Bill: Glad to hear that you wrote about this important subject too. It's an important one .. and growing even more so.
Bob: It's amazing how quickly the cutting edge .. becomes the norm. Dillards and your father obviously set us on a new and useful path. Thanks for writing ..
Gary: Very true! We live and die by the numbers ... especially these days. Great point!
Emily: Thank you for your generous and kind words. I'm glad you found the article worthwhile .. and wrote to let me know.
Bruce: I think there are so many variables that play into these numbers ... coming up with a real method or "recipe" to decipher them becomes increasingly hard. It's truly a personalized representation of your finances. I am with you ... wish it was easier ...
Corinne: Good to see you! Thanks for stopping by ... and the re-blog ...
Concord R.E.: Wow! I'm honored that you're including this in your class. Thank you .. and good luck with the class .. and the short sales ...
SaraGray: Always glad to see you. Happy to hear that you will find the info useful ...
Cliff: I appreciate that you wrote all the kind words. Hope you find good uses for the info ...
Gene
I'm sure alot of customers will appreciate this insight. Thanks for posting.
I have customers that I just closed, lender was Wachovia and was nightmare! They had 760 credit scores prior and Wachovia waited over a year to approve (meantime a transition to WellsFargo). My customer's credit card limits were slashed as well as some not renewing their credit cards after the card expired. I felt bad, but they had to do it as one lost their job and they couldn't afford to pay.
Thanks for a great summary of important info for all of us to know - for our clients and ourselves! Especially since some things that SEEM like a good idea can actually be a negative on credit scores.
Paul: Thanks for writing, Paul .. always good to hear from a fellow LO. Your kind words are very much appreciated too ..
Kristen: I really tried to express things so our customers could follow them and understand. Thank you for letting me know that I succeeded!
Catherine: Your kindness is appreciated. I hope that this article continues to serve you well.
Raine: I'm going to say ... I'm not used to hearing the word awesome in my comments ... but I'm liking it alot! Thank you ... and I hope to hear from you again ...
Vanessa: I appreciate your re-blogging this article. I hope it helps many understand FICO scores better ...
Heather: Thanks for letting me know that further clarification is still needed. I will address this in an upcoming post this week. Let me know if I still need to explain further ...
Zac! Hey .. good to see a familiar Chicago Bancorp face!! Appreciate your taking the time to write and letting me know that you saw the article. I'm hoping I represented the office well!!
Jane: Thank you for the re-blog. Hope it helps your So-Cal clients well ...
Judy: Great to see you! It's a damned-if-you-do and damned-if-you-don't thing, isn't it? Totally understand your situation when applying for the Scottsdale property. The intracacies of this scoring are amazing! We own a vacation home in Galena. Not quite as exciting as Scottsdale ... but let me know if you're interested in bartering???? lol We still have great golf in the Territories and Galena area ... if you're into that sort of thing too. Thanks again for writing ...
Gene
Shari: I'm glad you are finding the topic and content useful and informative. I appreciate your writing and letting me know ...
Gene: Sometimes you'd think that was all there was to it!! It's comforting to know that it isn't voodoo though .. there's some reasoning to it. Thanks for writing!
Linda: Hope it proves helpful to you. If I can help in any way further ... let me know. I'm just around the corner. Good to hear from you ...
Esko: I think you're probably right! Hopefully if we keep getting the info out ... it will reach more people and prove helpful. They need to understand the seriousness of it ...
John: Glad you found it helpful .. and hope it helps your customers moving forward. Thanks for re-blogging ...
Loannetter: I think it's great that you tackle this issue with consistency through your blog. I'm sure it proves of great assistance to many. And you're right ... even we LO's need to keep up-to-date on things ... and must always be learning the new. Thanks for writing ...
Judy: Glad you sought clarification ... and found the answers you needed ...
Jennifer: Hopefully the clients/public that read it understand it ... or seek further answers if needed. I appreciate your kind words ... and your stopping by. Hope to hear from you again ...
Michael & Ceili: You bring up a very important point ... the future. We professionals will need to stay on top of this credit issue in order to help our future clients well. I'm sure we'll see more than a few changes in the meantime. Appreciate your bringing this topic up!
Brittany: Unfortunately yours is not the only time we have heard this horror story. I fear many were caught-up in these poor circumstances. We can only hope that the situations improve as we move forward. Thanks for telling your story ...
Hey Nancy! Good to see and hear from you again!! You're absolutely right ... many issues can be misleading concerning credit. What would seem the common sense thing to do ... just isn't. Education concerning this issue is key. Hope all is well with you ...
Gene
This is one of the best explanains I have seen. Thanks Gene.
Wayne: Thank you. You are kind. Hope it helps you and your customers ...
Gene
I know people who were 12 hours late on their credit card payment, had to make a late payment and were dinged 80 points on their credit score. Small wonder that buyers are finding the qualification process more difficult these days. Perhaps derivation of the FICO score should be updated to reflect the reality of current times.
Gene: Congrats on the feature. Great info and always very confusing since the recent shake up. I have to say that your FICO score is more important than what people ever realize. Have a bad one or low one & it costs you plenty. Not paying attention can cost you plenty too!
Thanks for the breakdown. I was just trying to explain to my stepson, and new University of Michigan graduate, how credit works.
Excellent post about FICO. Very few people understand how they're calculated. This gave us new insight into this confusing topic.
Al: Something worth discussing and considering, that's for sure. As far as the credit card payment and credit card companies go ... they can't implement tougher restrictions on them fast enough. They always seem to be one jump ahead of the new credit card laws and consumer protections. These companies have certainly done major damage to people's lives as well. You make an excellent point ...
Lyn: Thank you ... and yes, having a lower credit score means a huge loss of dollars to a homebuyer. It's truly staggering how it increases the lifetime cost of a mortgage and cost of a home. We need to impress this more on the young kids ...
Eric: I have two sons out on their own and college graduates. Having a dad in the real estate business serves them well, as I'm sure your son is too. I know living life is sometimes the best teacher ... but these days, they can't afford to make many mistakes. That's where we come in. They can still learn from dad no matter how old ... Thanks for writing ...
Bernadine: I'm glad you got something out of my post. I hope it serves you and your customers well in upcoming transactions. Thank you for commenting ...
Gene
Hi Gene -- You are the first one to make it black and white. Thanks for the breakdown percentages.
This is important information for consumers to have as they try to understand the effects different situations will have on their credit.
Gene - The point range drop for being late is a valuable new piece of information to help explain how FICO scores work and why it is important to pay on time.
Gene: People always ask about the scores because they are trying to protect themselves. This post offers a great resource.
Gene, great post and worthy of a reblog. Question for you....a late payment hurts the credit score but after a year or so the damage is pretty much mute (in my observations at least) but how long will the foreclosure or bankruptcy hurt them?
You know what I've been wondering, Gene? If a borrower is 30 days late and then makes up that payment on day 59 but fails to make the present monthly payment, thereby running into another 30-day late, how does that reflect on one's credit report? Say you have been 30 days behind for 4 months (because you always bring the previous month current), is that reflected as 4 30-day late pays? And if so, is that worse than 120 days behind?
Great post. Thank you for reminding us that we are more than just our credit score. Job loss, illness, death, are all things that happen in life and can put a tremendous strain on family finances. In these instances people are in survival mode and their credit score may have to take a backseat to the realties of life.
Thank you so much for this information. I will be passing this on.
This is an excellent recap of the credit score calculation. It's important to note that one should not stay in unsustainable debt just to maintain a credit score. I see way too many people consider their credit score before quality of life and economic stability. IMHO, the FICO score is the greatest marketing ploy that the financial sector has every come up with - it's a form of debtors prison. The credit score can be rebuilt with relative ease if the consumer is educated and proactive about it. In fact, for the average person, it's probably easier to rebuild a credit score than it is to regain lost money paid in interest to keep it.
In an economy where far too many people are in financial hardship, far too many of us push the FICO score as the most important financial number in our lives.
For people who are not in a finanicial hardship, it is important to maintain or rebuild. For consumers in a financial hardship and suffering with crippling debt due to loss of income, increased expenses or medical situation, a hit to the credit score can be a very smart financial decision.
Wow....now can you tell us how long it will take to re-establishh our credit if everything gets back on course ? Really Valuable info
Chris, Christine an Marc: It was very helpful that FICO let loose with a little more info and insight than they have in the past. This extra info will definitely help many consumers better understand the damages felt when payments are late. Thank you for writing ...
Melissa: It is one of the most often asked questions for me as well. This extra info more clearly shows the actual loss to scores ... which I think will be helpful.
Damon: As with many things, just starting down the path to poor credit scores is where the most major damage occurs ... IMO. I agree with you. Just this one missed payment can keep someone wanting to buy (or refinance) from doing so for a length of time. I don't think most people understand the true ramifications of that error. As of right now, the price paid depends on whether the mortgage held was a conventional loan or FHA loan (re: foreclosure) .... and there is a difference between the time you must wait dependent on it being a bankruptcy or foreclosure. To make it even harder to explain ... these "rules" can change quickly. It truly makes offering hard and fast credit guidelines a tricky proposition. I'm going to try to write another post re: this topic again this upcoming week.
Elizabeth: You don't ever want to show either .. obviously. IMO, it is a minor difference and most likely a mute one within the current underwriting atmosphere ... but again, IMO it is better to be only 30, 60, 90, days late than a longer term. This is my interpretation of this scenario. As you know, one lender's underwriter vs another may see it differently. It is best to present the individuals' payment scenario to the lender involved and let them make that determination. Thanks for writing ... and asking the question ...
msWoods Realty: I'm glad you found this article valuable and thought-provoking. I appreciate your writing and letting me know ...
Gary: This new info ... come to light via FICO and the media ... does help clarify this issue. Something that will help us all in the future ...
Kate: Well said. I have heard that they are reviewing and considering making the credit score a moot point in the setting of insurance rates ... and also making it illegal to run when considering employment. It will probably be a length of time before a final decision is made regarding these issues ... but given the current financial hardship felt by so many ... it seems to me to be a fair thing to do ... at least in the short term. I appreciate your input ... and your writing ...
Mark: It's hard to give you any definitive info on that without being more well-versed on the debt's severity ... and the type of debt being discussed. I will tell you this ... as a rule of thumb ... it's much easier to do damage to your credit score than it is to repair it. Protecting your score is always the best route to take.
Gene
We give our short sale sellers credit repair sources so that they can begin rebuilding their lives,,,,we are amazed sometimes at the speed that can happen...if everything BUT the mortgage is in good standing.
Sally and David: Yes, it can be done with diligence and consistency. People need to realize this. All is no lost forever and it's not the end of the world. You can rebuild ...
Gene
Thanks for your feedback, Gene. I was wondering about the 4 30-day lates as opposed to one 120-day late because some lenders force sellers to stop making their payments to grant a short sale. Sellers who could otherwise afford to make their payments and want to make their payments. Naturally, I get asked if they could just stay 30 days behind to qualify -- and the answer to that question is yes. But I don't have an answer for them as to how all those 30-day lates affect credit -- nor would I really want to tell them even if I did know since every creditor's situation is different. But I was just curious.
Gene ~ congrats on this featured post! It's a very succinct and well-written explanation of how FICO scores are determined and impacted by current market forces (especially for novices like me).
Thanks for wonderful informative post. I am subscribing to your post as of now. Realistically how long will one have to wait after Chapter 7 to be able to buy a home? If someone who files Chapter 7 comes into money in 12 to 24 for months after discharge, what effect does going back and paying creditors have on the FICO score?
An excellent post: Short and not so sweet.....but to the points.
I'm probably the last one in the country to re-blog this, but here goes....
Good stuff Gene. Re-blogging for those in the Janesville and Madison WI areas. Keep up the good work!!
Michael Collins - Broker
Rock Realty
www.RockRealtyWI.com
Elizabeth: Understandable. Supplying someone credit information blindly is very unwise. Even offering the info that I did in this article (via FICO release) makes me somewhat uncomfortable ... as someone is going to take it as gospel instead of a "rule of thumb". Mortgages, credit, finance has all become so specific to the individual's personal scenario. You have to add the lender being used before you can even begin to get near specifics. Throw special situations like short-sales and foreclosures or bankruptcies into the mix and you can see how intricate the process is. LO's are not trying to be evasive ... it's just difficult to give definitive answers when there are so many variables. Thanks for writing again Elizabeth. You ask a very good question .. one that is most likely asked of many agents and brokers.
Maureen: Thank you for your kind words. It's appreciated. Don't be put off or quit asking questions. In this day and age of quickly-changing financial and credit changes ... even so-called "experts" need to ask questions often. Please feel free to ask me anything. I'll help if at all possible ...
Tom: Thanks for subscribing. I'll be answering more questions re: credit soon. I'll try to be more specific and answer your question at that time. Again, credit and the issues surrounding them are so specific to the client's scenario and the lender involved ... it's hard to clearly define answers without acquiring that info first.
Jim: I appreciate the re-blog. I'm honored. I hope it serves you and your readers/clients well.
Rock Realty: Thank you for re-blogging the article. Sure hope it helps those in your area. My wife has many relatives in that and the surrounding area. Her mom grew up in Brodhead. Good people!
Gene
Gene,
Brodhead is not very far at all. This area is a great place to live. If anyone you know ever needs some realtor assistance in the area, let me know! Go Badgers!! :)
Michael Collins - Broker - Rock Realty
Rock Solid Real Estate Strategies
www.RockRealtyWI.com
Gene - Thanks so much for explaining this so the average consumer can understand how FICO scores are rated and how your decisions can affect the scores. Like others I am bookmarking this to use as a tool when talking with clients.
Kathie: I have met so many AR members that I did not know previously because of this one article. For that I am really greatful. I'm glad that this proved helpful to you. There were some very good questions written in response to it ... so I'll be following up with more info in the very near future. In the meantime, if I can clarify anything, please let me know. Thank you for writing, Kathie ...
Gene
Gene- I don't know how I missed this, but it is so concise and easy to follow! I, alomg with half of your commenters, am going to reblog this!
Thanks a million!
Hi Dagny! It's easy to miss something here on AR ... there's so many good blogs to read and soak up. I appreciate your kind words and gesture. Hope it helps someone ... and proves beneficial to you too!
Gene