Short Sales and FICO Scores
Posted by: Mark Albright on Wed, Apr 17, 2013Share this post
Obviously we all agree that a bankruptcy is the worst thing for your FICO scores. Not only does the filing of the bankruptcy damage your score but so does the litany of debts that are going to also show up as being included in the bankruptcy. A FICO score of 680 becomes FICO 530-550. FICO 720 becomes FICO 525-545. And, FICO 780 becomes FICO 540-560.
But what about short sales. A short sale with a deficiency balance, which they all have, is a settlement for less than the full amount due. This has the SAME impact on your score as a foreclosure sale, regardless of where your score starts from (680, 720 or 780). The following is the impact of both a short sale and a foreclosure; a FICO score of 680 becomes FICO 575-595. A FICO score of 720 becomes FICO 570-590. A FICO score of 780 becomes FICO 620-640. There is a slightly higher score result if there is no deficiency balance (which is rare with short sales but some lenders are starting to accept them) but you’d have to convince the lender to not report that balance, which of course would be incorrect credit reporting (a tough sell with most lenders). The following is from the FICO website charting the impact described above and other scenarios.
FICO’s data also includes “how long to recover” output, which is especially helpful for consumers who have already gone through some sort of mortgage related disaster and are wondering how long it will take for their FICO scores to recover to some degree If you paid 30 days late, it takes a FICO score of 680 approximately nine months to recover. It takes a FICO score of 720 some 2.5 years to recover and it takes a score of 780 about 3 years to recover. This shows the importance of paying your mortgage on time. It also illustrates how damaging the loan modification trial payment period can be if you’ve got great FICO scores. If you did a short sale or foreclosure your FICO score of 680 would take 3 years to recover and your 720 and 780 scores would take some 7 years to recover. That means while the item is on your credit reports your scores will not fully recover (evidence of a short sale or foreclosure remains on a credit file for 7 years). The following is from the FICO website charting the time to recover from certain scenarios.
A couple of additional observations:
Fair Isaac released a report recently that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Issac, which generates the FICO scores, says the average points lost on a FICO score are as follows:
- 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
- Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same, says David Steep of Vitek Mortgage. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 380.
- Short Sale
Steep maintains that the effect of a short sale (providing the sellers are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale seller with a previous FICO of 720 could see it fall from 520 to 420.
Waiting Period Before Buying Another Home
- Some experts claim a seller who wants to buy another home after foreclosure will end up waiting about 24 to 72 months before a lender will offer any kind of interest rate that makes sense.
- Foreclosure or Deed-in-Lieu of Foreclosure
Some expedrts argue that a seller who wants to buy another home after foreclosure will end up waiting about 24 to 72 months before a lender will offer any kind of interest rate that makes sense.
Some are finding that the good news is a short sale will often allow the consumer to obtain an institutional loan for a new home within two years.
For more information, see the Fannie Mae Selling Guide online.
- Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and Fannie Mae guidelines in 2008 adopted new procedures.
- Can a seller buy again in less than two years? Fannie Mae guidelines now require only 24 months’ seasoning, and that’s good news for agents who specialize in short sales.
Short sales still aren’t easy. Agreements can take months to negotiate, and many fall through. A successful deal usually requires a tenacious and persistent homeowner, especially if one is to obtain a waiver or forgiveness of the deficiency balance. So, shouldn’t all that good behavior be rewarded? The FICO formula is, essentially, amoral. The FICO software was not designed to reward or punish, said Frederic Huynh, FICO’s senior scientist. Instead, he explains, it was constructed to predict the likelihood that a borrower will default on a credit obligation within the next two years. Additionally, FICO formula creators didn’t have a lot of experience with short sales when they decided to treat them the same as foreclosures, said Paperno, who worked at FICO for 16 years before joining Credit.com. Until recently, short sales were relatively rare.
G. Mark Albright
Albright, Stoddard, Warnick & Albright
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