The Truth About Credit Scores and Mortgage Delinquency

Today Eileen Ambrose of The Baltimore Sun reported on a study conducted by FICO into the true damage that happens to a person’s credit score when they miss mortgage payments or go through a short sale or foreclosure.  They analyzed how the score would be impacted if you had a high credit score (780) a good credit score (720) and an average credit score (680) and how long it would then take your score to recover back to its previous level if you had no other damaging factors.

The study produced a number of interesting results.  First, it debunked a myth which exists within our industry, and that is that short sales damage your credit score less than foreclosures.  As both are reported as defaults upon your mortgage and both result in losses for the lender, they damage your credit score equally no matter what your credit score was before.  In both short sales and foreclosures, it can take a long time for your score to recover from the damage caused by a default event (3 years if you have a 680 score at the start to rebuild your score to a 680 again, or 7 years to rebuild your score to its starting point if you had a 720 or above).  Now there is truth that you can qualify to buy a home again sooner after a short sale rather than a foreclosure, as both FHA and Fannie/Freddie have rules about how long you must wait after a foreclosure before being allowed to purchase again, and generally those rules are applied in a much shorter amount of time on a short sale (usually 5 year limit for foreclosures and 3 years for short sales).  If you could get your score back above the minimum of 620-640 used for FHA right now within 3 years of a short sale it would allow you to recover faster than a foreclosure…just it would still take another few years to get your credit score back to where it was previously. 

One other thing from the study I found interesting was how badly being a single month behind on your mortgage affected your credit score.  While I always knew the biggest component of a person’s credit score was their history of paying bills on time, I didn’t realize that a single missed payment would affect their credit score by over 10% of their current score!  If a person with a 680 credit score missed a single mortgage payment their score would drop between 60-80 points.  You might think that missing a payment just once when you have a great credit history might be met with a little more forgiveness than if you had a history of missing payments in the past (or a lower score).  Not so…in fact you get hit even worse for missing a single payment if your credit score starts higher.  If you had a 780 credit score and missed one payment your score would drop between 90-110 points off of that one offense (and that can take up to 3 years of perfect credit records to restore your score back up to your previous 780 level). 

What this study really showed was that you have to be on time with your payments if you want to have a good credit score.  Missing even one payment can do damage that can last for years and is far more significant than you might think if you didn’t know better.  This is very important for people to understand, whether you own a home now, intend to buy one in the future, or even just want to be accepted for nice rental homes instead of having to live in low end apartment complexes the rest of your life.  All of these things require good credit scores to do, and it can take years to restore your score once you damage it!  Share this article with those who are important to you so they can better understand what they need to do to protect their credit scores.  Keep Dreaming!

The article from the “Sun” can be found at: http://www.baltimoresun.com/business/real-estate/bs-bz-ambrose-fico-scores-foreclosure20110502,0,1824554.story?page=1

Shrinking Foreclosure Inventory. Investors Coming Back?

While we in the industry wait with much anticipation for the Appellate Court to hear the lawsuits against the Frank-Dodd bill which are beginning today, I thought I would share some local news with you today that relates to my article from over this weekend.

This weekend I wrote a rebuke/rebuttal of an article on how the “Shadow Inventory” of 1.8 Million homes was going to destroy our market when it arrived.  If you didn’t read why I thought this was a load of excrement, I would encourage you to go back and read it HERE.  As part of that article, I stated that our local inventory of foreclosure properties had dropped by nearly 40% since the start of the year. 
I would like to revise that figure this afternoon.  At the start of this year, there were 72 foreclosure sales on the market in Howard County, Maryland.  I know the number exactly as I do a weekly list of the top 50 foreclosure deals in the county for people to find on the internet if they are interested in that type of home, and I remember having to cut 22 homes off of that list to make my top 50.  For the last month, I’ve had to have a disclaimer on my “Top 50 Foreclosure Deals” page, stating that the current inventory is under 50 homes and therefore I no longer have 50 homes to put on my list!  This afternoon I went to update that list for the current week and see that we are now down to 28 forclosure homes in the entire county. 
This is a 61% reduction in the number of foreclosure homes on the market just over the last 4 months. 
This includes the two new foreclosures that have come on the market in the last week too, so I’m certainly not leaving anything out to make the numbers look better.  This isn’t some sparsely populated region with only a couple hundred homes total either, with our “suburb” of Columbia easily having a population larger than some “cities” in other parts of the country. 

What is causing this REDUCTION in the available foreclosure inventory faster than this “Shadow Inventory” can keep up with it?  First, many first time home-buyers are looking to foreclosures as a cheap way to get into a home, even if it is one that they will have to spend thousands fixing up in the future.  By buying it for a lower price, even needing the investment to fix it up, many people are looking at it as better in the long term since their payments will be so much lower. 
Second, and I think a much larger part of it, investors are starting to get back into the real estate market, viewing the prices as not likely to fall that much more, and even if they do, with the rising cost of renting they can turn a profit every month renting the home after they finish fixing it up. 
For an example of why you would want to invest in housing, at least in our local market, right now there are two foreclosure homes in Elkridge (my home town) which are 3 bed townhouses for $149,000.  Depending on where you live in the country, that might sound like a ripoff to you…but in our local area that is currently about $100,000 below where the normal home sales are going for in this particular neighborhood.  On a purchase price of $149,000 you would probably have a monthly payment on a fixed rate mortgage of somewhere near $1050 per month (purely estimated but including taxes and insurance as part of that estimate).  This neighborhood has an HOA fee of around $80 a month, so after all is figured in you would probably have a monthly cost of around $1150 a month at most.
Since 3 bedroom CONDOS are currently renting for an average of $1500-1600 per month, and these townhouses are larger that those condos, these two units could probably rent for a range of $1600-1650 per month.  Even at the low end of the rent, this unit would earn its investor around $450 per month in rent.  Even if you had to invest $5,000-10,000  to fix the home up after buying it, you would make that back in a matter of one to two years.  This doesn’t even factor in the tax deductions which you gain from owning an investment property (not as large as you get for owning a primary residence, but still significant).  By the time you factor that in you are making even more off of a home like this one!

Maybe you have some extra money that you were thinking of investing.  Maybe you are tired of watching your stock funds move up and down like a roller coaster.  If so, maybe talk with a Realtor in your area and see if the possibility of investing in real estate is as good of a prospect in your market as it is in mine (or call me and invest here no matter where you live!)  Either way, those brave enough to ignore the talking heads in the media who want us to believe it is only getting worse and look at the cold hard numbers right now will stand to make a killing moving forward!

When others are Greedy, I get Fearful…When others are Fearful, I get Greedy~Warren Buffett
Maybe now is a time for some “Greed” from mainstreet while the media tells us to cower!

Keep Dreaming!

The Forgotten Victims in Foreclosures: Tenants

With banks fraudulently foreclosing on homeowners, and other homeowners strategically foreclosing on homes to get out of their underwater obligations to the banks there are both banks and homeowners that are victims of parts of this foreclosure mess that we are in the middle of.  There is a ton of coverage of both sides of this issue in the media, and on this site too.  What you don’t often hear about is what happens to the tenants of the people who get foreclosed on. 

Not every homeowner who gets foreclosed upon is living in that home at the time the property is taken from them.  What happens if you are paying that homeowner for the right to stay in their home, but they aren’t paying that money to the bank so they have the right to keep it?  Read further find out.