From the Blown Mortgage Blog

Loan Modifications, Foreclosures, Short Sales, and The Truth About Your Credit Score

Posted: 09 Apr 2010 08:04 PM

There has been a lot of ink spilled on the issue of loan modifications, foreclosure, short sales, and their effect on your credit score. Depending on which newspaper, blog, or Wikipedia article you read there are a couple dozen theories or authoritative statements on how the whole credit scoring system works.

If you are planning to do any of the above: modify your mortgage, foreclose on your mortgage, short sale your home, or any other loan related activity it is worth finding out what the effects will be on your credit score. But why is our credit score so important? And, how does your payment history affect it?

Your credit score is important because it summarizes your credit risk to lenders and businesses. It is a number that describes your financial reliability as a borrower. Some employers and landlords also use this score as one of many ways to get a background check on us. If we apply for a loan and our credit score is low we a) might not get approved, or b) will have to pay higher interest rates than if we he had a higher score. It is as simple as that.

What makes up your credit score?

The biggest factor is your payment history. Around 35% of your score is based on your borrowing and paying record. This is quite understandable; a lender is justified in wanting to know if you have paid your debts in the past. This does not mean that a single (or event two) late payment/s will automatically destroy your credit score. An overall good record of paying your loans could outweigh a couple of bad instances.

This doesn’t mean either that if you have no late payments you will have a perfect score (that would be 850, in FICO’s main scoring system), there are many other factors to consider.

How long will past delinquencies affect your credit score for?

Bankruptcies, foreclosures, wage attachments, and other cases of delinquency seriously affect your credit score. How recent and frequent a case of delinquency is also counts in your credit score. Bankruptcies will stay on your credit report for 7 to 10 years depending on what chapter you filed under. The good thing is that more recent activity in your account will weigh more in your credit score than older delinquencies. A foreclosure, even though some of our readers would like to believe otherwise, will stay on your credit report for a long time. How long is not specified by FICO, but even a 90 day late payment 5 years ago will affect your credit score. Although thankfully the longer ago a delinquency occurred the less effect it has on your score, which means it is worth trying to improve your score because what you do now will have a great effect on your score.