How Much Will A Foreclosure Impact My FICO Credit Score? – Episode #49

Foreclosures and short sales will impact your credit score significantly!

How many points will my credit score drop from a foreclosure? There is no correct answer here, and anyone who tries to give you an exact point drop is guessing. I’d expect a 100-150 point drop for most folks from a foreclosure. A 200 point drop is more likely if you had a score over 750-800, but I suspect few people are in this scenario, as most people are looking at foreclosure after maxing out credit cards and being late on other loans.

The length of time your credit score needs to recover? Again, it depends, over a year in most cases. A foreclosure is not quite as damaging as a bankruptcy and a bankruptcy can take 18 months or longer to improve your credit score. Your score is not likely to reach the 800s until the foreclosure drops off your credit file and that will take 7 years. Remember, a bankruptcy takes 10 years to fall off your report.

Because of the credit crunch, Fannie Mae has stated new requirements before you can be approved again for a home loan:

• Foreclosure: 5 years from completion date; additionally between 5 and 7 years you can only purchase a personal residence, and must have a minimum of 10% down and 680 credit score. Also you can only do limited cash-out; no regular cash-outs are permitted. After 7 years you’re back at square one.
• Deed in lieu: 4 years from completion date; also 10% down payment required between years 4 and 7.
• Short sale: 2 years from completion date.
• Chapter 13 bankruptcy: 2 years from discharge date or 4 years from dismissal date
• All other bankruptcies: 4 years from either the discharge or dismissal date

In addition, you should know that a short sale is seen as similar to a foreclosure by the credit score models. Perhaps, you could get a break as the lender might not report the short sale -whereas a foreclosure will definitely be reported — but I wouldn’t count on this.

Do Consumers Really Understand Credit Scores? – Episode #48

Consumers have a lot to learn when it comes to credit scores. The bad news is that consumers really don’t understand credit scoring well enough. The good news is that consumers are getting more intelligent about credit scores. The Consumer Federation of America did a study and here are some of the key stats.

• 28% knew that 700 was the lowest score that would get them the best rates. [interesting that they used 700 as I think 760 is the cutoff for the best rates].
• 31% knew it was the risk of repaying a loan
• 67% knew that a large payment against would increase your credit score
• 59% know that landlords use credit scores in evaluating applicants
• 64% know that insurers look at credit scores

In the same study with Wamu as a partner with CFA, they projected the savings from increasing credit scores by 30 points will save $28 billion.

Here’s what consumers got wrong:

• 74% think income is a factor in credit scores [this is false]
• 40% think age is a factor in credit scores [this is false]
• 38% think marriage is a factor in credit scores [this is false]
• 29% think education is a factor in credit scores [this is false]
• 29% think the state they live in will impact their credit scores [this is false]
• 15% think ethnicity in credit scores [this is false]

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