Joanne Gaskin, FICO's Director of Mortgage Product Management, and the company's resident expert on mortgage lending, wrote about how research looks at the effect of mortgage delinquencies on credit scores on the FICO Analytics Blog.
To prepare the data included in the charts posted below, Gaskin examined consumer profiles that were typical of three current types of "good" scores: 650, 720 and 780.
The first chart illustrates the three types of designated consumer profiles, and what happens after the homeowner goes delinquent on his or her mortgage (30 or 90 days), completes a short sale, deed-in-lieu of foreclosure, or a settlement (with no deficiency balance), completes a short sale with a deficiency balance, foreclosure or bankruptcy.
The second chart clarifies the estimated credit score recovery time that would be required after each of the missteps.
While the results may not be surprising, the research clearly underscores the importance of staying current with mortgage payments. For example, the charts illustrate that being 30 days late with a payment, even once, can result in a fairly precipitous drop in credit score across the spectrum. In fact, there seems to be only a short distance between this drop and the one experienced by a consumer entering foreclosure proceedings.
This may seem counter-intuitive, but Gaskin explains, "Being 30 days late signals a distressor and inability to pay. If in fact you are concerned about not being able to make your payment, be proactive because there is help out there in the form of a variety of forbearance programs."
Another noteworthy situation is located in the fortunes experienced by the three hypothetical consumers after a bankruptcy filing. In this scenario individuals with diverging scores are basically reduced to the same level (mid-500s), and experience a similar 5-10 year climb back to good standing.
I think what's most interesting to me about these numbers is that the higher your credit score, the harder you fall. If your credit score is a 780 and you have to go through bankruptcy, it's a 7 to 10 year climb back to excellent credit health. But it's only 5 years to get your credit score back to 680, which is the level at which you'd likely be able to get an FHA loan.
This leveling of the playing field might appear unjust to those who worked very hard to achieve excellent standing before a run of bad luck. Gaskin explains that the equalizing "has to do with the credit risk associated with someone who has declared bankruptcy and the risk of continuing to be delinquent. Bankruptcy is defaulting in the most severe manner possible, so the past doesn't matter. People who may have had years of dependable credit history are now back at square one with everybody else."
The Great Recession has left many families with tough choices. But what this research makes clear is that homeowners facing a cash crunch may want to place late or non-payment of their mortgage at the end of a list of options.
Because the resulting impact of just one late payment on your credit profile can be devastating, and enduring.
What do you make of FICO's research? Does it change the way you think about taking on a mortgage?
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.