If you don’t make your mortgage payments, you could lose your home to a foreclosure, which will significantly hurt your credit score. Even if you avoid a foreclosure with a loan modification, short sale, or deed in lieu of foreclosure, your credit score will probably take a severe hit.
Keep reading to find out how credit scores work, what happens to your credit score after a foreclosure, as well as how a loan modification, short sale, or deed in lieu of foreclosure affect your score.
How Credit Scores Work
When you apply for a mortgage loan, the lender will get your credit score to help in assessing your creditworthiness. Credit scores, in theory, show a potential lender whether you’re likely to repay a debt. Statistically, borrowers with higher credit scores are less likely to default on payments than borrowers with lower scores.
Your credit score is based on your past credit information, including:
- your payment history on your debts
- how much outstanding debt you have
- the length of your credit history
- the types of credit you have, and
- whether you’ve gone through a foreclosure or filed for bankruptcy.
Credit cores usually range from around 300 to 850, with a higher score indicating that someone has a good credit history compared to someone with a lower score. The largest and most universal credit scoring company—FICO—uses a range of 300 to 850. VantageScore, another credit scoring company, uses a range of 501 to 990 in its older models, but 300 to 850 in its newer model.
How Late or Missed Payments Affect Your Credit Score
If you miss a payment on a debt—like a mortgage payment or a credit card payment—the creditor will usually report the skipped payment to the credit reporting agencies.
The creditor will report your delinquency as 30 days late, 60 days late, 90 days late, and so forth. The agency then lists the delinquency on your credit report. The more often you pay late or if you stop making payments altogether, the more negative items appear in your credit report. FICO says your score will drop around 50 to 100 points when the creditor reports you as 30 days overdue. Each reported delinquency hurts your credit score even further.
Foreclosures: The Drop in Score Varies from Person to Person
Going through a foreclosure tends to lower your score by at least 100 points or so. How much your score will fall depends to a large degree on your score before the foreclosure. If you’re one of the few people who had a high credit score before a foreclosure, you’ll lose more points than someone with a low credit score. Foreclosure has less of an impact on someone who already has a low credit score. According to FICO, someone with a credit score of 680 before a foreclosure will lose 85 to 105 points after a foreclosure. But someone with a credit score of 780 before a foreclosure will lose 140 to 160 points.
How Foreclosure Avoidance Options—Modifications, Short Sales, and Deeds in Lieu of Foreclosure— Affect Your Credit Score
The various options to avoid a foreclosure—like a loan modification, short sale, or deed in lieu of foreclosure—can damage your credit score as well.
How a loan modification affects a credit score. A loan modification doesn’t have as much of an effect on a credit score as a foreclosure, a short sale, or a deed in lieu of foreclosure. The impact of a modification primarily depends on how the lender reports the modification to the credit agencies. If the lender reports the modification as “paid as agreed,” the modification probably won’t hurt your FICO score. But if the lender reports the modification as something like “not paying as agreed,” your score will almost certainly go down. Though, any negative impact on your credit score because of a modification won’t be nearly as bad as what happens to the score after a short sale or deed in lieu of foreclosure.
How a short sale or deed in lieu of foreclosure affects a credit score. Short sales and deeds in lieu foreclosure are pretty similar to foreclosures when it comes to hurting your score. If you’re one of the few homeowners who hasn’t missed a payment before doing a short sale or a deed in lieu of foreclosure, these events will cause more damage to your credit score. Again—like with a foreclosure—those who have a high credit score lose will more points after a short sale or deed in lieu of foreclosure than someone who already has a low score.
If you avoid owing a deficiency with your short sale or deed in lieu of foreclosure, your credit score might not drop as much; but, overall, there usually isn’t a big difference between foreclosures, short sales, and deeds of lieu of foreclosure when it comes to how much damage your score will suffer.
Don’t Fall for Credit Repair Scams
Any company that claims it can quickly repair your credit or wipe a foreclosure off your credit record is usually a scam. There’s no magic way to improve your credit after a foreclosure, loan modification, short sale, or deed in lieu of foreclosure, though the impact of these events on your score will lessen over time. Remaining current on your other debts and disputing any incorrect information in your credit report are the main ways that you can help your score recover.
Talk With a Lawyer
If you have questions about how to improve your credit score, consider talking to a credit repair attorney. If you have questions about ways to avoid a foreclosure, consider talking to a foreclosure attorney or HUD-approved housing counselor.