Homeowners who are falling behind on a mortgage often worry just how much they might be damaging their credit score.
How much will a score be dinged if a payment is late a month or more? Or worse, what happens if the homeowner must resort to a short sale or winds up in foreclosure?
FICO, which produces the widely used credit score of the same name, says it has been getting many such questions from regulators, lenders, loan servicers and others who advise consumers with mortgage troubles.
So to answer those queries - and to dispel some myths - the company analyzed the effects of different mortgage scenarios on consumers with poor, good and excellent scores.
Lenders use credit scores to decide whether to extend credit and under what terms.
One of the big myths, FICO scores director Joanne Gaskin said, is that a short sale is better for a credit score than a foreclosure.
A short sale is a deal between the lender and homeowner, who finds a buyer to purchase the house for less than what's owed. In a foreclosure, the lender seizes the house and attempts to sell it to recoup its money.
In both cases, a lender gets back less than what's owed on the loan.
"Both are considered a default. There is little difference in impact," Gaskin said.
FICO scores range from 300 to 850; the higher the number, the better. In its analysis, FICO looked at three scores: 680, which is low; 720, good but not prime; and 780, something to brag about.
In a foreclosure or short sale, the low score would shed 85 to 105 points; the middle score would drop 130 to 150 points; and the high score would plunge 140 to 160 points. (When problems arise, the better your score, the harder you fall.)
In certain cases, a short sale could be less damaging than a foreclosure. Credit scores are derived from information that lenders and others send to credit reporting agencies. Some lenders report a short sale without including the amount of debt the borrower didn't repay.
When a balance shortfall isn't reported, a score would be 35 points higher in a short sale than a foreclosure, FICO said.
That's not much, but there are better reasons to consider a short sale, said John Ulzheimer, president of consumer education for SmartCredit.com.
With a short sale, you're more likely to maintain the property and its value, which is good for the neighborhood and the lender, said Ulzheimer. And lenders might look more kindly on you in the future.
