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Credit Recovery


Credit Recovery
 By Nagle Law
Q.  How Long Does It Take For My Credit Score To Recover following a Foreclosure or Short Sale?

A. This question is frequently asked of me at  client meetings, so I know it must be on people’s minds . We intuitively know that if we’re delinquent on our mortgage, our credit score will be lowered. The question is, by how much? Until earlier this year, the answer was hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much credit scores would be reduced by different types of mortgage delinquencies.

      CNNMoney.com recently reported, that Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.
Here are the average hits your credit will take:

30 days late: 40 - 110 points
90 days late: 70 - 135 points
Foreclosure, short sale or deed-in-lieu: 85 - 160
Bankruptcy: 130 - 240

     According to the CNNMoney article, to come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

 The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

   According to Craig Watts, a spokesman for Fair Isaac, “The lending industry tends to regard an account differently when it has become 90 or more days late.”

    Mortgage borrowers can lose their homes in three basic ways: a foreclosure; a short sale, where the home is sold for less than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

     Maxine Sweet, vice president for public education at Experian, said credit bureaus generally slash scores equally regardless of how someone lost his home. The important factor, is that “it’s reported that you paid less on a settled account.” Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”

And what about repairing your credit?

    The effects of foreclosure, short sale and bankruptcy on your credit score are long-lasting, according to Sweet. In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove. A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

   And, in an interview with the President of Fair Isaac published in John Ulzeiheimer’s blog “A consumer with a foreclosure or similar default on her credit report can expect her score to begin recovering after a couple of years if she consistently pays all her bills on time, keeps any credit card balances low, and takes on new credit only when needed. As the default event ages on her credit report its influence on her score will diminish, until the credit bureau removes the record from her file after seven years.” Summarizes Ulzeiheimer, “The bottom line is this: You can’t fully repair your credit score in as little as nine months unless you can convince the credit bureaus to remove the items from your credit reports.”

    Despite the problems a poor credit score can cause, Experian’s Sweet recommends that people in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem. “You need to do what you need to do to get your finances back in order,” she said. “Don’t worry about your credit score.”

    Mr. Nagle is a partner with Nagle Law Group, P.C., focusing on residential transactional and debt management matters, and can be reached at 602-595-3156 or robert.nagle@naglelaw.com.

Nagle Law Group’s experienced legal team combined has been practicing real estate and bankruptcy law for over 50 years. They pride themselves on being dealmakers and not deal breakers, an important distinction when deals present many complex questions from clients! For more information, please contact Robert Nagle or Stuart Pack at (602) 595-3156 or email them directly at info@Naglelaw.com.
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