The housing crisis put an emphasis on predatory mortgage lending practices and the effects on underwater homeowners. Here is a summary of the Fair Isaac Corporation (FICO) study on how various types of mortgage delinquencies affected consumer credit scores.
The FICO credit score is a standard consumer credit profile metric in the financial industry. Although credit score calculation criteria is public knowledge, the exact formula has been a tightly guarded secret that many companies have tried to duplicate, but failed.
Joanne Gaskin, Director of Mortgage Scoring Solutions at FICO, recently released a study that showed the effects of different types of mortgage delinquencies on representative credit bureau profiles of consumers scoring 680, 720 and 780. “We focused on consumers whose credit characteristics (e.g. utilization, delinquency history, age of file) were typical of the three score points considered.”
How Mortgage Delinquencies Hurt Credit Scores
The following tables from FICO show the credit score drops after specific delinquencies and the amount of time it generally takes for credit scores to rebound to pre-delinquent levels:
Here are some other findings from the study:
- The magnitude of FICO score impact is highly dependent on the starting score.
- There’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
- While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.
- In general, the higher starting score, the longer it takes for the score to fully recover.
- Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.
Gaskin noted that these numbers are only representative figures – every person’s credit history is different and mortgage delinquencies will have different effects on credit scores that may not match the results of the research.
While this information may not detail the effects on a person’s unique credit profile, it gives a good idea of how mortgage delinquencies can impact credit profiles. Distressed homeowners can use this data to evaluate their different options and resulting effects and make an educated decision with regards to handling a mortgage loan gone bad.