Thursday, March 06, 2008
Fair Isaac: The impact of foreclosure, deed in lieu and short sale on FICO scores
I received the Fair Isaac newsletter today and it’s all about foreclosures:
How will your FICO score consider a foreclosure?
There’s no denying that foreclosures are considered a very negative event by your FICO score. With that said, it’s a common misconception that a foreclosure will make it impossible to rebuild your credit. In fact, if you keep all of your other credit obligations in good standing, there’s a good chance that your FICO score could begin to rebound in just 2 years. Try to pay your auto loans, credit cards and any other credit obligations on time to limit the effect of this foreclosure.
Are other options better for my credit standing?
Recently, several alternatives to foreclosure have become popular - some of these include “short sales” and “deeds-in-lieu of foreclosure”. These may be viable options for you, and you should definitely do research to determine if these options make sense for your situation. However, as far as your FICO score in concerned, there is no difference between foreclosures and short sales or deeds-in-lieu of foreclosures. Each of these actions is considered an account that was “not paid as agreed”, and will have the same impact to your FICO score.
From my experience, I can confirm this to be true.
Cooperating with the lender and trying to resolve the issues to minimize the lender’s losses will NOT help your credit.
So if that’s your plan, be aware that it won’t help your FICO scores and you might try negotiating the credit reporting directly with the lender. It’s unlikely that they’ll give you anything in writing, so your best bet is to mention credit reporting by PHONE and to RECORD.
Don’t bother if you’re not going to be willing to fight over it.
It’s best to keep it simple and ask that they not report the account to the credit bureaus. If they agree, they’ll probably still report, but you can fight it.
Don’t ask them not to report the foreclosure, as that means that they can still report the account as delinquent and that won’t help you at all.
Record the entire call and make sure the bank person is identified (they usually don’t give last names), along with the department.
Do NOT try to confirm with another person or with a supervisor that they won’t report, they will most likely NOT agree to it and you shot yourself in the foot.
It is NOT illegal not to report, no creditor has to report anything according to the FCRA.
It would be a violation of the lender’s contract with the credit bureaus to report as “paid as agreed” while it was NOT “paid as agreed.”
And, I once read somewhere that certain mortgages HAVE to be reported, but I haven’t been able to find any documentation for that. Please let me know if there is such a regulation anywhere, especially Equifax loves to delete POSITIVE paid accounts early to lower the credit scores.
Most important, I’ve just seen 700+ FICO scores for reports with 2 and 3 recent collections. That’s because everything else looked excellent and there were many positive accounts.
If you’re going to default on other accounts, do some planning and keep low balance and OLD accounts current.
Creditors often lower limits or even close accounts when they review your credit and see delinquencies. So you do want to carry a balance for the best chance of them leaving the account open. If you have a 15 year old credit card with a $20k limit, it doesn’t matter much if they lower the limit to $1,000, as it’s most important to keep the account OPEN. Many creditors realize that if they CLOSE the account, you have little incentive to pay. If you have no balance, they are obviously more likely to close the account.
Loan modifications and principal reductions:
I have not yet seen the reporting of a principal reduction. Make sure you review what they report to all 3 CRAs prior to negotiating. They SHOULD continue to report the mortgage, but obviously it should be positive with no mention of a “charged off” amount. Ask how they’ll report the loan. Again, make sure you RECORD and please post here if you have any questions.
Whatever deal they propose, compare it to the cost to living in the property free of charge until they foreclose and then renting or buying a comparable property at next year’s prices.
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