A question I frequently receive is how mortgage delinquencies—late payments, short sales, foreclosures, etc.—impact a consumer’s credit score. And for the first time (in my experience), the creators of the FICO score have published research results that provide point-specific details on how these various mortgage delinquencies can impact a FICO score—as well as insight into how long it takes the score to recover from these incidents. Note: VantageScore published a similar study specific to the VantageScore scoring model in January 2010.
[Related Article: Credit Q&A: Short Sales, Foreclosures and Your Credit Score]
The FICO study answered these questions by focusing on three different score profiles—consumers with starting scores of 680, 720 and 780. (FICO scores range from 300-850 where higher scores equate to lower future risk.) The FICO study then estimated the impact on the score based on a variety of negative events associated with a mortgage loan, such as a 30-day late payment, short sale, foreclosure, bankruptcy, etc.
FICO Score Impact Findings:
- The impact on the FICO score (drop in points) is greater when the starting score is higher. For example, a foreclosure would drop a starting score of 680 anywhere from 85 to 105 points, compared to 140 to 160 points if the starting score was a 780. This makes sense because the 680 score already reflects some degree of risky behavior (thus the starting score of 680 vs. 780)—so the point impact isn’t as great.
- There is little difference in score impact between a short sale, deed-in-lieu, settlement or foreclosure.
- A bankruptcy has the most substantial impact on the FICO score—with the potential to drop a 780 score by 240 points (to 540).
The study also provides insight into how long it takes the score to fully recover from these negative postings. Credit scores are “forgiving”—as negative information ages, it has less impact on the score as long as current credit behaviors are positive.
FICO Score Recovery Findings:
- Full recovery to the starting FICO score (prior to the posting of the negative item) is faster when the starting score is lower and the negative item posted was less severe. For example, it takes a short 9 months to get back to 680 when the negative item posted on the mortgage was a 30-day late. This is compared to the 7 to 10 years to get back to a score of 780 if a bankruptcy was posted.
- For a score to fully recover from a short sale, deed in lieu, settlement or foreclosure takes 3 years for a 680 starting score, 7 years for a 720 starting score and 7 years for a 780 starting score.
The study is welcome information because for the first time, FICO provides us with an inside look at the direct impacts and point losses on the score. This information can help consumers get a better sense of how various negative indicators on a mortgage loan could impact their FICO score—and how long it can take for their score to fully recover. It’s important to note these findings are basic guidelines and the exact impact on your score will be unique to your individual situation.
The research findings reinforce the importance of paying your bills on time in order to maintain a higher credit score. For more information on the FICO study, click here.
Image by trindade.joao, via Flickr