Ask the right questions

Mortgage related derogatory events are not a fun topic. But reality being what it is, these days lots of people are asking the same difficult questions: How much will a foreclosure hurt my credit score? Would a short sale go easier on me? How long will it take to recover from any kind of mortgage catastrophe?

Until recently, we just couldn't come up with reliable answers to these questions because credit score details were considered trade secrets and highly guarded. But now the folks at Fair Isaac Co., creator's of the FICO score models, are willing to tell us how short sales and foreclosures impact individual FICO scores and the kind of recovery time we can expect from these negative events.

 

No difference. A short sale with a "deficiency balance," which all short sales have because that's what a short sale is a settlement for less than the full amount due has the exact same impact as a foreclosure, regardless of your starting score (680, 720 or 780): 680 becomes 575-595; 720 becomes 570-590, and 780 becomes 620-640.

Recovery time. FICO's data also includes "how long to recover" output, which is especially helpful for consumers who have already gone through a mortgage-related disaster and wonder when their FICO scores will rebound. Let's skip the suspense. It takes a long time for your FICO scores to fully recover from a short sale or foreclosure, even from a late payment.

30 days late. If you have a 680 score and pay 30 days late even once, it will take nine months of on-time payments to get back to 680. If you were at 720, it will take 2.5 years. And if you have an excellent score of 780, it will take three years.

Short sale, foreclosure. If you do a short sale or go through foreclosure, your 680 score will take three years to recover, and your 720 and 780 would take seven years. While the item remains on your credit report, your scores do not fully recover (evidence of a short sale or foreclosure remains for seven years).

The higher the score, the farther the fall. The amount of time for a 680 to recover from a bankruptcy is as little as half the amount of time it takes a 720 and 780 to fully recover. This is because excellent FICO scores require pristine credit files, and scores of 680 do not.

If you can convince your mortgage lender to not report the deficiency balance (the difference between what you owed on your mortgage and the negotiated sale price of the home) to the credit bureaus after your short sale, your score will actually be a little better than if they do report the balance.

Short sales without a reported deficiency balance would trim 105 to 125 points from a 780 score, according to Fair Isaac. But lenders who've been hammered into a short sale often aren't in the mood to grant you additional favors or violate their commitment to accurate reporting.