Lecture 1 Careful Before You Decide To Foreclose
How Much Will A Foreclosure Hurt My Credit Score?
The housing market correction was brutal. If you are one of the millions of people considering foreclosure or a short sale, you need to read this post first and understand all the consequences before proceeding. If you are already in foreclosure or going through a short sale, then you should check your latest credit score and figure out how to climb out of purgatory.
A foreclosure and a short sale have similar negative hits on your credit score. A foreclosure is generally worse because you are not working with your bank whom you owe money to settle your debts. A short sale, on the other hand is debt forgiveness. Your bank agrees to forgive the difference between the sale and what you owe. Just be aware you will probably have to pay taxes on your deficiency. There is no free lunch.
Once your credit score gets trashed, it takes anywhere from three to seven years to fully recover. Sometime your score may never fully recover at all. With all the questions I’ve received on the subject, and my own temptation of letting one of my vacation properties go during the economic crisis, this post should help you weigh the pros and cons of foreclosure or a short-sale. The information is gathered from our friends at FICO, two real estate lawyers I spoke to, my own experience, and thoughts from several mortgage officers.
How Much Will Your Credit Score Get Hit In A Foreclosure?
According to FICO, if your credit score is 680, a foreclosure will drop your credit score on average by 85 to 105 points. If your credit score is excellent at 780, a foreclosure will drop your score by 140 to 160 points. In other words, the higher your credit score the more it will get smashed! High credit score holders must think much more carefully before foreclosing or conducting a short-sale. My Trans Union credit score dropped from 790 down to 685 during my tenant’s $8 non utility bill payment debacle a couple years ago, so I completely believe FICO’s figures.
Here’s a brief summary of averages from Fair Isaac:
- 30 days late: 40 to 110 points
- 90 days late: 70 to 135 points
- Foreclosure, short sale or deed-in-lieu: 85 to 160
- Bankruptcy: 130 to 240
It’s really hard to get much lower than 500 (out of 850) on your credit score even if you tried. If you do have a poor credit score, find solace knowing that banks will equally deny someone a loan or refinance for scores up to ~650. The main reason is there are enough 650+ credit score holders lining up to borrow money that it’s not worth taking the credit risk on lower credit score individuals. If you have a poor credit score, the alternatives are borrowing from your 401k, from friends, or through Foreclosures Repair..