Defaulting on a Mortgage: How it Affects Your Credit Score

Many consumers have taken a financial hit with the recent economic climate.  As more people are defaulting on their home loans, it is interesting to see the impact on FICO scores. 

What may be a surprise is how many wealthy people with good credit are going into foreclosure.  A recent article by the Arizona Republic mentioned how affluent, savvy homeowners are choosing to default on their home loans based on weighing the pros and cons to such a decision.  “Recent research suggests that affluent people tend to be the main strategic defaulters, and these individuals are also the ones who would sustain more serious credit-score damage.  This chart shows the resulting credit scores for two hypothetical consumers – one with an average initial score of 680 on the FICO scale and another with a high initial score of 780.”

Situation Initial 680 Score Initial 780 Score
30 days late on mortgage 600-620 670-690
90 days late on mortgage 600-620 650-670
Short sale, no deficiency 610-630 655-675
Short sale with deficiency or foreclosure 575-595 620-640
Bankruptcy 530-550 540-560

The savvy homeowner that sees their home investment as a money pit, may go ahead and buy what they perceive as a better home  purchase, perhaps a short sale, before they default on their original investment.  In this way, they have good credit to purchase the new home before they take the hit to their credit score caused by the default of their original home purchase.