COMPLETED SHORT SALE – No Impact on Credit? Think Again!
COMPLETED SHORT SALE – No Impact on Credit? Think Again!
SHORT SALE CAN REDUCE NEW VANTAGE CREDIT SCORE BY AS MANY AS 130 POINTS!
There are some Real Estate Practitioners who advise their distressed homeowner clients to short sell their home if necessary to avoid the devastating credit-score-killing impact of foreclosure. Lenders still have to swallow a portion of the borrower’s debt never to paid back however – and this can result in a 120+ drop in the homeowner’s credit score.
Of course selling short will have less of a credit score impact than allowing a foreclosure. On average as reported by Syndicated Real Estate Columnist Kenneth R. Harney in the October 2nd Edition of the Chicago Tribune the credit score drop for a homeowner going through foreclosure is 150 points perhaps higher plus a stained credit file for as many as the next seven years.
File for Bankruptcy? Expect a massive credit score drop of over 355 points and a major derogatory mark against your credit for 10 years.
Estimate drops in credit score and quality come via estimates from Vantage Score Solutions a credit risk prediction company competing with the long-standing "standard" scoring technology – the FICO Score.
The Vantage Score is now being used by a number of major banks instead of the old FICO Scoring. Vantage Scores range from a low of 501 for the highest risk borrowers to 990 for those super-prime borrowers with the lowest likely credit risk to lenders. The new credit scoring system was developed by the three major U.S. Credit Bureaus – Equifax Experion and TransUnion – to more reliably predict borrower behavior and repayment likelihood.
Unlike the older FICO Scores the credit scores from Vantage rarely vary from credit bureau to credit bureau. In some cases FICO Scores can vary by 50 points or more depending on the credit bureau.
Indeed the way borrowers in trouble handle their debt repayment can greatly impact their likely subsequent credit score. Most credit experts suggest starting conversations with creditors to arrange for loan modification or other forbearance terms early before late payments begin to add up. Waiting too late can trim hundreds of points of your credit score and potentially damage a borrower’s credit for several years.
Have all the distressed mortgages – pre-foreclosures foreclosures and mortgage delinquencies – reduced the overall average credit score among consumers across the U.S.? Indeed they have!
In the First Quarter 2008 about 36.6 Million of the 213 Million U.S. Consumers who had a credit history in one of the three largest U.S. Credit Bureaus earned Vantage Scores in excess of 900 – the highest credit rung. These borrowers at that time represented 17.2% of all U.S. Consumers. By the end of June 2009 however the percentage in this highest rung slipped to 15.4% of the total. That represents an over 10.4% drop in credit quality in just a six month period.
As the ranks of the highest-credit-qualified shrank those in the worst credit rung – those under a 600 Vantage Score began to increase in numbers and in percentage of the total U.S. Consuming Public. During the Third Quarter 2006 – three years ago – 16.6% of all U.S. Households held sub-600 Vantage Credit Scores. By the Second Quarter of this year that percentage increased – to 18.3%. At mid-year 2009 10.2% more people had the worst ranked credit than they did just over three years ago!
DEAN MOSS & DEAN’S TEAM CHICAGO
