How Foreclosure, Short Sales and Bankruptcy Affect Credit Scores

I just talked to a borrower, who moved to North Carolina for a job, and they needed to know how Foreclosure, Short Sales Bankruptcy Affect Mortgage Credit Scores in 2013.  It’s changed some – mostly because so many people in America have gone through hard times in the last five years.  If you’ve had a rough spot in the past – don’t be afraid to talk to us about it, because you are not alone!

If all the “bad” stuff is behind you, then it might be time to start work on your credit report.  But where to start?  We think it’s helpful to know what is currently hurting your scores the most.  There’s a scoring system that each repository uses, so Trans Union calculates scores a little differently than Equifax and Experian.

FAIR ISAAC Damage Points – per FICO.com:

• “Maxxed out credit card” – 10 to 30 points
• 30 day late payment will cost you 60 points
• Bankruptcy hits your scores for 130 to 150 points
• Foreclosure will damage your score by 85 to 105 points
• Debt Settlement service (like a Consumer Counseling Service) will cut your score by 45 to 65 points.

Those are for an average score of 680.  If you had a great score of like, 780 going into whatever issue you had, unfortunately, you got hit TWICE as bad!

The Impact of A Foreclosure on your Mortgage Credit Score

There are different ways for a foreclosure to show on your mortgage credit report.  Foreclosures can be reported on a Mortgage Credit Report as a Deed in Lieu, a Short Sale or a “straight up” Foreclosure.  The Foreclosure could be in connection with a Bankruptcy – and if so, there’s additional

Short Sales should have less of an impact than Foreclosure, however, because the American Credit Reporting  Agency doesn’t have a “code” that denotes a short sale, banks actually reporting them in many different formats.  If the Bank reports the Short Sale one way – we’re good, another way, and it appears as a Foreclosure.  Additionally, in some cases the Realtor is able to negotiate with the Bank and the deficiency balance could be forgiven.  If this is the case, you will have late mortgage payments, but it will not show on your credit report as a “straight up” foreclosure.

If you go through a Foreclosure OR a Deed in Lieu, it will show on your credit report as an “8” – which means Foreclosure. Again, this is about a 100 point hit, and you will likely be required to wait at least 2 years to purchase another home.

Loan Modifications for the first 90 days will lower your score.  It’s reported as a partial payment.  It’s only for a 3 month period.  Supposedly the hit to the score is not as bad as foreclosure.  Fair Isaac is looking to see if they need to make a change to modeling based upon modification.  In most cases, we see Underwriters requiring at least a 12 month waiting period to buy or refinance again after a Loan Modification shows on a credit report.

Waiting Periods

One of the important details about Foreclosures is the Date of Transfer.  We read that you need to wait 24 or 36 months to purchase – but the key question is, wait from WHICH date?  The date they file the Bankruptcy, or Foreclosure proceedings is completely different from the date of TRANSFER.  This is not the date that the Foreclosure shows on the Credit Report, it’s the date on the paperwork you get from the Court House that shows the property originally went OUT of your name – and into the name of the bank.  Unfortunately, we’ve seen cases where a Bank was so backed up that it took 6 to 8 months from the date of the proceeding to the date they transferred title.  The date of TITLE transfer is the day the waiting period starts.  

USDA Loans in North Carolina make you wait three years from a foreclosure, FHA and VA Bankruptcy and Short Sale guidelines only require a two year waiting period.

In addition to waiting the 2 or 3 years to pass – work on your credit scores during this time.  To purchase a home in 2013, you will likely need at LEAST 18 months of clean, on time payments, with NO Collections or Judgments filed against you.  You will need a credit score of at least 620 to get approved for one of the Government Loans, and if you are applying for one of the Grants from the  NC Housing Finance Agency , you will also need at least a 640 credit score.  The NCHFA First Time Home Buyer Program is NOT just for First Time Home Buyers in NC.  The Program is open to anyone who has not owned a home as a Principal Residence for at least 3 years – so it might be a great benefit!

Don’t let bad credit issues in your past keep you from looking for a home now!

If you are “Past the Storm” and you are now ready to purchase a home, please call Steve Thorne, NC Mortgage Expert , 919-649-5058.   Or, leave us a question here about How Foreclosure, Short Sales and Bankruptcy Affect Credit Scores, I try and answer all inquiries immediately.   You can also connect with us on Facebook or Google Plus.  We are going to give you honest answers about what you can do!