Why Short Sales, Foreclosures Damage Credit Similarly

Here is an interesting story which relates the reasoning and includes Blog postings from the FICO Web site about why these events hit the credit scoring so hard and there being no real difference between Short Sale, Deeds-in-Lieu and Foreclosures. In my opinion, the fact of the matter is that when you experience financial difficulties to get into a situation to be considered for these alternatives or a Modification, as well, you have usually missed from one to many mortgage payments. This is where the real damage is done in your credit scoring, especially if it takes quite a while to close whichever alternative you end up with. Your late charges go from 30 days to 60 days to 90 days to 90+ then 180 then 180+ and on and on. This is happpening while your credit scoring is spinning downward monthly. The label the final action is given at the end is really immaterial and while there is a difference (certainly future lenders look at the difference in reviewing any application for future credit from 1-7 years down the line, depending on the Agency and loan program) the damage has already been done and nobody told you about that. Read on for the story ... Daily Real Estate News | Friday, September 07, 2012 With short sales, home owners work with a bank on a solution to get out of a house they may no longer be able to afford or have to sell urgently for some reason. That’s why some argue short sales shouldn’t damage a person’s credit score in the same way as foreclosures, which can be much more costly for banks. So should the penalty for a foreclosure more severely damage a borrower’s credit score than a short sale? No, maintains a new FICO study. FICO conducted a study to determine the credit risk associated with “mortgage stress events,” such as foreclosures and short sales, by analyzing data from October 2009 to October 2011. “While it is true that short sales represent slightly better risk than foreclosures, they do not perform well enough to merit a more positive treatment in the FICO Score,” according to a recent blog post on the FICO Web site. The blog post goes on to explain that one out of every two borrowers who undergo a short sale go on to default on another account within two years. Also, according to researchers, an overwhelming majority of borrowers who went through a short sale also had some other mortgage delinquency in their credit history. “From a weighting perspective, all these mortgage events – short sale, foreclosure, deed in lieu – fall into the same heavyweight class, because they correlate with exceptional riskiness,” the FICO blog post notes. “They aren’t alone in that class either. Based on the data, consumers with short sales perform no better than consumers who have a severe delinquency (90-plus days past due), a collection, or a derogatory public record (e.g., bankruptcy, tax lien, etc.) on file.” Keep the faith ...