How Delinquencies Impair Credit Scores
Fair Isaac, which developed FICO scores, used a comparison between two people to explain how mortgage delinquencies affect credit scores.
Fair Isaac derived these numbers from a theoretical calculation based on hypothetical borrowers – one with an initial score of 680 and one with an initial score of 780. FICO scores range from 300 to 850.
The hypothetical person behind the 680 score had six credit accounts, while the person with the 780 score had 10. The consumer with the 780 score had no missed payments other than the mortgage; the 680 example had two late payments before they failed to pay the mortgage.
After a mortgage delinquency, the two scores would look like this:
• After 30-day delinquency, 680 score drops to 620 to 640; 780 score declines to 670 to 690.
• After 90-day delinquency, 680 score falls to 595 to 610; 780 score goes to 645 to 665.
• After foreclosure, short sale, or deed-in-lieu, 680 goes to 575 to 595 and 780 drops to 620 to 640.
• After bankruptcy, 680 drops to 530 to 550; 780 declines to 540 to 560.
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HAMP Applicants Risk Credit Score Reduction
Borrowers who apply for the government’s Making Home Affordable program are likely to have their credit scores drop about 100 points.
This can be a nasty surprise if they try to get a car loan or even apply for a job. “It’s a feeling of being duped,” says Kathy Conley, a housing counselor with the nonprofit credit counseling service GreenPath Inc.
Credit rating agencies defend the reduction, saying that borrowers wouldn’t be applying to participate in the program if they weren’t having financial troubles.
Source: Associated Press, Alan Zibel (03/19/2010)
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Higher Rates Will Require Lender Explanation
Under new rules from the Federal Reserve Board and the Federal Trade Commission, borrowers who are loaned money at less-favorable rates because of their credit ratings must be notified and given a free copy of their credit scores.
Currently, lenders don’t have to offer any explanations. These rules apply to mortgage lenders as well as other sorts of financing firms. It takes effect Jan.1, 2011.
Consumers who are given terms “materially less favorable” than “a substantial proportion” of the lenders’ other customers must receive the information, according to the report in the federal register.
Source: Bloomberg, Jeff Plungis (12/22/2009)
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How Will Foreclosure Affect Credit Scores?
The amount of damage to a credit score caused by foreclosure, deed in lieu or a short sale during 2008 and 2009 may be mitigated by the slower economic times, say some credit and legal experts.
FICO may have to adjust its credit scores to lessen the impact of a foreclosure in the last two years, says Todd J. Zywicki, a professor of law at George Mason University.
”It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he says. ”To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”
One of the country’s largest credit unions Golden 1 has already figured out a way to lend to people with a foreclosure on their record by offering a mortgage repair loan specifically for those who have lost a home to foreclosure and who want to buy a new one.
BECU, another large credit union based in Washington State, is about to present a program to fellow lenders, ”How to Lend to the Newly Credit Impaired.”
Source: The New York Times, Ron Lieber (03/14/2009)
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