If you are involved in real estate, then chances are you’ve had to deal with a motivated seller who is behind on payments and trying to figure out their best options. And, with motivated sellers come many different goals that may require the utilization of different strategies.
When talking about the benefits of catching up payments and purchasing subject-to versus continued delinquency and purchasing via short sales or doing nothing and letting it go to foreclosure, many sellers will ask specifically about the effects of such strategies on their credit score.
In the past, FICO has been very secretive about this issue, and as such we in real estate have been unable to give direct answers. Well, now FICO has finally opened up and revealed a little more about what the effects of a foreclosure or short sale will be on a credit score.
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
As you can see this is still a pretty broad range, but three main factors will affect the drop in the credit score:
- Their starting credit score
- The number of open accounts
- How long they’ve had credit
According to Money.com, some borrowers will fall much more steeply than others for the same payment problem. Maxine Sweet, vice president for public education at Experian, states that “if you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more. For me, one missed payment would just be a blip.”
The point loss also depends on the borrower’s starting point. People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.
Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale or a deed-in-lieu. Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.” Many times these losses force people into bankruptcy, which is the worst possible scenario for your credit and may take up to 10 years to get over.
However, the big difference between a foreclosure, short sale, deed-in-lieu and bankruptcy can be in how fast you can recover and rebuild your credit again. According to FHA guidelines, you may be eligible to purchase a home again within two years of a short sale if you are able to show that since your short sale you’ve been able to pay all bills and have had steady employment.
Effects to a drop in your credit score not only effects your credit card rates, but is may also increase your insurance rates. According to the Insurance Information Institute, on average, a foreclosure can add an extra $120 per year to your auto premiums and an extra $60 per year to your home premiums.
In conclusion, with this information, real estate professionals now have more knowledge to help educate struggling homeowners on the effects of short sales, foreclosures, deed in lieus and bankruptcies on their credit report. This information should help them choose a strategy which is better for them depending on their overall goals.