Your Home and Your Credit Score

So your home has negative equity, and it appears that it will remain that way for a while. Things are tight and you have either missed some mortgage payments or are about to. You are weighing your options – short sale, foreclosure, deed-in-lieu of foreclosure, and even bankruptcy. You have worked through the requirements of each, consulted with a knowledgeable Arizona real estate attorney, and considered the costs of each scenario. All the costs that is, except for how your choice will affect your credit score.

This has always been a difficult cost to assess in part because the credit reporting agencies (Experian, Equifax and TransUnion) use proprietary formulas in calculating your score. Each uses the information they receive about you differently. Due to the uniqueness of each person’s set of circumstances, it is thus difficult for these agencies to express in terms of averages, how your decisions regarding your house will impact your credit score in terms of how many points your score will drop because there are just too many variables

However, reports that Fair Isaac (who developed FICO scores) did provide some estimates of how various mortgage delinquency issues can affect your score. These estimates were based on a two different hypothetical persons – one with a higher initial score, and one with a more modest score. Under the hypothetical, one had more credit accounts than the other, one had no adverse credit history, while the other had two “damaged” accounts, and neither had any accounts in collection.

The decline was expressed in ranges. A thirty day delinquency on your mortgage payment could result in a decline of 40-110 points. Going to a ninety day delinquency could result in a decline of 70-135 points. A foreclosure, short sale or deed-in-lieu could result in a decline in a range of 85-160 points. Finally, a bankruptcy could result in a decline of 130-240 points.

The hypothetical creditor with more accounts, higher initial score and longer credit history suffered a small decline, because each of these reduced the significance of a missed payment. While the creditor with fewer accounts, lower initial score and shorter credit history suffered a higher decline because he had few positives outweighing his negatives.

Your home, and the mortgage you have on it, is likely one of the biggest components of your credit score. Managing that score wisely will affect how much it will cost for you to borrow money in the future, to obtain insurance or to rent an apartment. However, if you are in financial distress, the first thing to do is to figure out how to stop the bleeding, and which of the various options cited above will assist you in getting back on your feet.