FICO stands for Fair Issac Corporation, the creators of the credit industry's standard score used by most lenders. Your mortgage becomes part of your FICO score since its viewed as a credit account. As with any credit, regular and on-time payments have the greatest influence. If your mortgage balance is too high relative to your income, the score could go down. Mortgage loans are considered a different kind of credit than credit cards, which are revolving accounts. Neither one is better than the other, but having a mortgage may diversify your mix.
Your mortgage payments fall under the "amount owed" category on a credit score. In that way, it's no different from credit cards, student or car loans since the lender sees it as more dough you owe. If your mortgage is new, it will influence the 10 percent of your score tied to new accounts and your credit mix. Since payment history makes up 35 percent of your score, full on-time mortgage payments will make it go up. The less you've got to pay back the better, as 30 percent of your FICO score is what you owe.
Being late with your mortgage payments will reduce your FICO score. Your score prior to the late payment(s) will also affect the impact. According to the FICO Banking Analytics Blog, a mortgage payment 30 days past due will drop a score of 720 to between 630 and 650. Let that go 90 days and the 720 drops to between 610 and 630. It could take up to three years for the score to recover.
If you do a short sale, where the bank sells the house for less than what you owe, it won't help your FICO score. Let's assume you have a score of 720. You owe $100,000 on your mortgage, but your house sells for $80,000. The bank uses the $80,000 to recoup most of its loss, but you'll still have a deficiency balance of $20,000. That will stay on your credit report for seven years and keep your score in the 570 to 590 range.
Foreclosure or Bankruptcy
If a short sale isn't an option, and you have to foreclose or declare bankruptcy, your score will go down. Foreclosures also stay on reports for seven years, and can take a FICO score of 720 down to around 570 to 590. A bankruptcy may stick around on a report for a decade. Its credit impact is even worse as that 720 will slip to between 525 and 545.
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