Earlier this month, Fair Isaac Corporation (FICO), the pioneering credit score company, published a study that examined consumer profiles that were typical of three current types of “good” scores: 650, 720 and 780.
The purpose of the study was to compare different classification of home mortgage delinquencies and how those delinquencies affected a homeowner’s overall credit profile.
Joanne Gaskin, FICO’s Director of Mortgage Product Management and the company’s resident expert on mortgage lending, posted the information and numbers on the FICO Analytics Blog.
The post includes two easily digestible charts. The first illustrates the three types of designated consumer profiles, and what happened to the credit scores of these “consumers” after each of the following events: They were 30 days late on mortgage; they were 90 days late on mortgage; they completed a short sale/deed-in-lieu/settlement (with no deficiency balance); they completed a short sale with a deficiency balance; they went through a foreclosure; and bankruptcy.
The second chart delineates the estimated credit score recovery time that would be required after each of the events, at each of the three chosen points on the credit continuum.
The elements of the study represent a sea change from prior years, when a credit score as low as 600 would be enough to secure a viable mortgage. But as Gaskin points out, in the new world of mortgage finance, a credit score of 620 means “…you’re getting to the point where the grantor may think you’re not worth the risk…with credit tightening, we’re seeing a ratcheting up of the credit standards.”
In fact, it appears that 720 would be the new minimum for a prime conventional loan, though it’s possible to get an FHA loan with a lower credit score.
Gaskin’s findings underscore the importance of staying current with mortgage payments and seeking resources and assistance at the first sign of trouble.
Just being 30 days late on your mortgage means your credit score will drop precipitously. In fact, the difference in the hit your credit score will take between being 30 days late in paying your mortgage and going into foreclosure isn’t that big.
“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,” Gaskin explained.
With many homeowners still caught in the throes of the recent Great Recession, missing even a single payment has been a fairly common occurrence. But just because you’re late once, doesn’t mean you’ve destroyed your credit history and score forever.
“If you had just one 30-day late instance, allow me to point out that payment history is only 30 percent of your FICO score. Let’s say you’ve had good long standing history. That one late payment will age and within a short time, will stop being a factor. Any credit grantor should allow you to explain that anomaly and it should not preclude getting credit,” Gaskin noted.
One 30-day late payment isn’t so bad. But what happens if you have to go through a bankruptcy filing?
In this scenario, the research showed that individuals with scores of 680, 720 and 780 are basically reduced to the same level (the mid-500s), and experience a similar 7 to 10-year climb back up the credit ladder.
If this seems unfair to those who have worked very hard to achieve excellent standing before a bad financial break, you should know that lenders consider a bankruptcy filing to be the ultimate risk.
“That has to do with the credit risk associated with someone who has declared bankruptcy and the risk of continuing to be delinquent. [The act of] 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,” Gaskin explained.
It’s a tough decision to make. But if you can avoid going into bankruptcy, the research shows your credit history will recover more quickly.
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