What happens to your credit score and ability to buy a home after a foreclosure, bankruptcy or short sale

The post below was stripped from an email I received from Ryan Halldorson, Smart Financial Mortgage, 602-793-7204.

One of the questions that I unfortunately get asked a lot these days is what happens to someone that has a Foreclosure, Bankruptcy, or Short Sale.

Credit scoring formulas are not disclosed so there is not an exact answer and the impact also depends on the person’s previous credit history. Credit scores take into account the previous 7 years of credit history with more weight given to recent activity. A person with a 7 year rock solid credit history will take less of a hit and their score will also recover quicker.

Foreclosures seem to drop scores 200-250 points and a foreclosure will also act as the heaviest ” anchor” to the credit score as you move forward. A foreclosure automatically disqualifies a borrower from getting a mortgage for 3 years (there are rumors that Fannie/Freddie wants to change it to 5 or even 7 years).

A Bankruptcy seems to drop scores 100-200 points and automatically disqualifies a borrower from getting a mortgage for 2 years.

The effect of a short sale can vary greatly. The credit bureaus have not created a special designation for a short sale. Many borrowers have to go 30, 60, 90 days late in order for a lender to consider accepting a short sale which will obviously have a huge impact on the credit score. Short Sales seem to usually show up as ” Creditor settled for less than amount due” similar to how settling a credit card balance would show up on a credit report. In some rare cases, they may even report the account as paid in full. There is not an automatic disqualification time period for short sales (yet) but many lenders are adopting their own policy that treats it as if it were a foreclosure.

Another item of note is that once a borrower goes 120 days late or once a Notice of Default is issued the Fannie/Freddie approval engine views this the same is it does a foreclosure.

The most important thing to do after having something bad happen is to re-establish a positive credit history.