Professional Home Staging and Photography Blog: Mortgage foreclosure will affect credit score, but how much?

Mortgage foreclosure will affect credit score, but how much?

Mortgage money to buy a houseThe home loan and real estate markets we are currently slogging through are unprecedented in their severity. The last time something similar happened was so long ago that few are still here to remember it. As a result millions of people are unable to make their home loan payments and subsequently will have their credit damaged. Three basic events can lead to that.

In short sale the mortgage lender agrees to let the homeowner sell the property for less than the underlying loan balance. Deed in lieu means that the borrower gives the deed, or keys, to the home loan provider before it starts foreclosure action. And then there is the foreclosure itself. All three will slam the homeowner's credit generally up to seven years. By how much depends largely on how many other accounts are in distress.

These guidelines evolved gradually during "normal" housing market conditions. At times when there weren't millions of borrowers in trouble with their mortgage payments. But today things are different. The real estate scene is uniquely clobbered, bringing along with it a historic price adjustment, too. One that was actually badly needed to better reflect a sustainable value structure.

What FICO, the most widely used credit standard, does is use its computer model to predict future borrower behavior, in other words assess risk. FICO score, say, eight years ago was able to lay out a rather representative picture of a mortgage borrower. But from about 2007 onward a totally new class of a credit applicant was introduced to be rated. An unusually large segment of today's homeowners who in some shape have defaulted, or will default, on their mortgage have had a decent to excellent credit rating up until this meltdown. Keeping that in mind, their current FICO score would not be as accurate a predictor employing the standard model. Once the economy improves and most of them will obviously recover financially and become good credit risks once again, they'd still be carrying for years dings to their credit.

Las Vegas valley - with localities like Mountains Edge, Summerlin, Henderson, Southern Highlands, Anthem, North Las Vegas and Green Valley - has its share of homeowners who fall under this category. Real estate upturn here in Southern Nevada - and throughout the nation - will be undeniably delayed because many home loan applicants just can't get approved due to FICO's slow update policy. But there is hope.

The mortgage industry still has those with the spirit of entrepreneurship. Some scattered portfolio lenders are already underwriting mortgages for borrowers with recent foreclosure on their record. They keep the loans in their own books since Fannie Mae and Freddie Mac won't touch them. And it's foreseeable that more will start doing that as they realize what untapped market it is.


Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 14 commentsEsko Kiuru • October 22 2009 10:19PM


How many points does a score lose?  In a short sale vs. foreclosure?  or deed in lieu?


Posted by Melissa Anderson (Mortgage of Texas & Financial) over 9 years ago

I floated a theory like this earlier this year too Esko.  It sounds like you, like me, think there is a good chance the recession will be factored into people's credit score in the future.  We can't guarantee that, but it sure seems likely, doesn't it?

Posted by Vic Steele, Broker/Consultant (Vic Steele, Broker CA BRE 01349863) over 9 years ago

I ask because the blog hints that he might have some numbers for us.

Posted by Melissa Anderson (Mortgage of Texas & Financial) over 9 years ago

You had me hooked Esko. I was looking for numbers. I figured a mortgae person would have a pretty good idea of the damage to a gredit rating.

Posted by Wayne B. Pruner, Tigard Oregon Homes for Sale, Realtor, GRI (Oregon First) over 9 years ago

Esko, I'm not surprised in the response by your small portfolio lenders. I expect we will see the entrepreneurial spirit this country is famous for innovate and create solutions to the current problems. While small business will be influenced by government and large banking there will still be that creative response to opportunities that develop. Thanks for sharing.

Posted by Steve, Joel & Steve A. Chain (Chain Real Estate Investments & Mortgage, Steve & Joel Chain) over 9 years ago


Please expand on your statement.  What portfolio lenders are you referring to?



Posted by Melissa Anderson (Mortgage of Texas & Financial) over 9 years ago

Interesting as always Esko!!  This one will definitely end up on my outside blog!

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) over 9 years ago


Every person is affected differently because of so many variables.

Posted by Esko Kiuru over 9 years ago


Great. Many of the recession-affected consumers are going to be financially strong again and I can see it being factored into the FICO model.  

Posted by Esko Kiuru over 9 years ago


Sorry, only FICO algorithm can feed out any numbers, based on each individual file.

Posted by Esko Kiuru over 9 years ago


Exactly. If there is a market, someone will get organized to serve it.

Posted by Esko Kiuru over 9 years ago


Appreciate it. Something to keep in mind as time goes by.

Posted by Esko Kiuru over 9 years ago

Esko, foreclosures, and short sales can be a killer on a persons credit.  Heck even going late just once on a mortgage payment can keep you from refinancing or buying another house for a year.  foreclosures and short sales have a far greater effect on a persons house then losing a house.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 9 years ago


Those events have a major impact on credit. Let's see if FICO does any adjustments due to this mess. They could be called mess adjustments.

Posted by Esko Kiuru over 9 years ago