The Impact of Foreclosures on Credit Scores

From Core Logic-Credco…

The Impact of Foreclosures on

The current trend in the marketplace is focused on the impact of foreclosures across the country. This trend has resulted in various opinions on the types of foreclosures (Short Sale, Deed in Lieu and Foreclosure) and its impact on a borrower’s FICO score.

This topic, which is raised in news articles and other industry collateral, has generated many questions among members of our various sales channels; mainly, how score models calculate each type of foreclosure. After soliciting assistance from various individuals and resources – including each of the three major credit bureaus and CreditXpert – we have compiled the following information for your review.

While many people have associated a target point impact anywhere from 100 points on a Short Sale to 280 points on a foreclosure, Fair Isaac has told us that FICO risk scores do not distinguish between the three types of foreclosures. There are so many variables in a consumer’s credit report (do they have collections or other public records?) in addition to the foreclosure account that a point impact is almost impossible to gauge. Furthecomplicating the score prediction is how the foreclosure account is reported, and if a public record accompanies it.

Each article we’ve seen suggests that a Short Sale has less of an impact on an applicant’s FICO score than a Foreclosure, but downplays the fact that there could be legal action taken by the lender on the defi ciency balance from a Short Sale. If this is the case, therewould then be both a derogatory trade line and a Public Record reporting. This is the same result as a Foreclosure; a derogatory tradeline plus the Foreclosure Public Record. Even without the Public Record filing there would still be the reporting of an MOP 8 on the Short Sale tradeline. This would have a negative impact on the applicant’s score equivalent to a foreclosure tradeline. Finally, Short Sales are typically facilitated to those applicants who have encountered credit issues.

These issues would be reflected in the derogatory reporting of other credit items within the consumer’s credit profile.

CoreLogic Credco does not provide legal advice; therefore, this information is not intended, or should be perceived, as offering legal counsel to our customers. However, there seems to be a considerable amount of incomplete or inaccurate information on this topic in the marketplace. That said, we hope this information will be helpful in addressing any questions you may field on this issue. 

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