Exciting Tuesday mortgage Q&A: “How does foreclosure affect your credit?”
Credit questions are never black and white, mainly because every consumer has a unique credit profile, making it impossible to pinpoint credit scoring impact.
But Fico released some interesting data recently regarding the effect of foreclosure on different types of consumers’ credit scores, shedding a little light on an often disputed topic.
What Was Your Credit Score Before Foreclosure?
The company looked at two different credit profiles, one average (680 Fico score) and one excellent (780 Fico score) to detail how foreclosure might affect your credit.
Borrower A: 680 Fico score —> 575-595 Fico score after foreclosure
Borrower B: 780 Fico score —> 620-640 Fico score after foreclosure
Despite the two consumers having initial Fico scores that were 100 points apart, which is pretty day and night, post-foreclosure, those very same credit scores would only differ by about 50 points. Seems pretty unfair, doesn’t it?
Borrower A would see their credit score fall to between 575-595, while borrower B would see it slip somewhere between 620-640. That’s a 100 point drop for the average credit score and a 150+ point drop for the homeowner with previously excellent credit.
More Creditworthy Borrowers Hit Harder by Foreclosure
You may be wondering why borrower B would take a bigger hit for the same derogatory event; simply because borrower A’s 680 score already reflects past risky behavior, so it’s factored in. Meanwhile borrower A’s foreclosure would be viewed as an unexpected and unforeseen event, and as a result, would impact their credit score pretty significantly.
And though the gap would narrow between the two consumers, borrower A would fall into subprime status (credit score below 620), while borrower B would still have a credit score in what some call the Alt-A realm. So there is still some distinction, despite the two credit scores being pretty close together post-foreclosure.
Of course, both borrowers would still be subject to the same rules with regard to obtaining a mortgage post-foreclosure (how long after foreclosure can I purchase a home?), so those three-digit numbers don’t necessary have as much clout as you may think.
However, your credit score will be instrumental in obtaining other types of credit, such as an auto loan, credit card, insurance, and so forth.
For the record, this is just one example of the potential impact of a foreclosure and credit scoring can vary widely.
Keep in mind that those who are eventually foreclosed on will have missed mortgage payments on their credit report first, so their credit scores will probably already be depressed before the foreclosure is factored in.
And many borrowers who are facing foreclosure may also have other missed payments on their credit report seeing that they are in distress, so those must be taken into account as well.