By Les Christie, staff writerApril 22, 2010: 4:44 PM ET

NEW YORK (CNNMoney.com)—If you’re delinquent on your mortgage, your credit score will suffer. Everyone knows that. The question is, by how much?

Until recently, those answers were hard to come by. Credit bureaus were uncommunicative about expressing, in points, just how much impact different foreclosure types of mortgage delinquencies have on scores.

Recently, Fair Isaac, which developed FICO scores, pulled back the curtain a bit, revealing some estimates of point-score declines following mortgage delinquency problems.

Here are the average hit your credit will take:

30 days late: 40 - 110 points

90 days late: 70 - 135 points

Foreclosure, short sale or deed-in-lieu: 85 - 160

Bankruptcy: 130 - 240

To come to these figures, Fair Isaac created two hypothetical consumers, one who starts out with a fair-to-middling score of 680 and the other with a very good one of 780. (FICO scores range from 300 to 850.)

The hypothetical person with the 780 FICO has 10 credit accounts versus six for the 580, plus a longer credit history, lower utilization of total credit limit and no missed payments on any account. The other consumer has two slightly damaged accounts. Neither have any accounts in collection or adverse public records.

See the chart above to see how each scenario affected each borrower.

Notice that for both borrowers a single one-time black mark results in steep drops, but it is when they fall further behind that things get really harsh, according to Craig Watts, a spokesman for Fair Isaac.

“The lending industry tends to regard an account differently when it has become 90 or more days late,” he said, “The likelihood that consumers will resume paying their overdue obligations drops off significantly after the delinquencies have reached 90 days.”

One reason credit companies were so closed-mouthed is that they often can’t definitively state how much each delinquencies will affect scores because there are too many variables.

Some borrowers will fall much more steeply than others for the same payment problem, according to Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus.

“If you picture someone who has just one mortgage and one other credit account versus a mature credit user like me with 15 accounts, if they miss one payment that would impact their scores a lot more,” she said. “For me, one missed payment would just be a blip.”

The point loss also depends on the borrower’s starting point: People with very high credit scores have more to lose than low-score borrowers; the impact of a single blemish on an 800 score is more than on a 500.

0:00 /2:23Homeowners overtaxed
Of course, it just gets worse when you face foreclosure.

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank (generally) forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Sweet said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.”

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

Mortgage debt, combined with other financial problems, can send borrowers into bankruptcy, the worst thing that can happen to your credit score.

The effects are long-lasting, according to Sweet. In a Chapter 13 bankruptcy, which involves partial repayment over several years, the stain will take seven years to remove. A Chapter 7 bankruptcy, which involves liquidation, takes 10 years to get over.

It’s gonna cost you
Absorbing a big credit-score hit can make many transactions more costly. It’s not just paying more for credit card debt and auto loans, insurance can cost more as well.

The average savings for someone with a good versus mediocre credit score is about $115 a year for auto insurance and $60 for home, according to Loretta Sorters, of the Insurance Information Institute.

A low credit score can even make it harder to rent a home because landlords often use credit scores to weed out prospective renters.

Despite the problems a poor credit score can cause, Experian’s Sweet recommends that people who are in financial dead ends, like totally unaffordable mortgages, it’s better to recognize that and cut your losses quickly; don’t prolong the problem.

“You need to do what you need to do to get your finances back in order,” she said. “Don’t worry about your credit score

The old 80/20 loans are gone for a while.  Most lenders require Mortgage Insurance is you have less than 20% down payment when you take out a loan for a house.  Most first time buyers don’t have 20% down payment, so they can avoid this by taking out one loan for 80% of the purchase price, and an addtional loan for 20% of the purchase price (which is then used as a ‘down payment’).  The problem is that the 20% loan is usually at a higher interest rate and many times is an adjustable loan.  Which is part of the reason why there are so many short sales and foreclosures on the market right now.  Those 20% loans are now adjusting upward and people can’t afford the payments. 

So if those 80/20 loans are a thing of the past, what does a buyer with not too much cash, but a decent income and credit score, do if he wants to buy a house in today’s market?  Go FHA.  It’s a lot less complicated than people think and in many cases it’s about the only loan that can work.  It is the loan with the lowest requred downpayment right now...that I know of.

So what are the parameters of an FHA Loan? 

1) 3% down payment (going up to 3.5% on Jan.1, 2009).  Must be paid by the purchaser (or can be gifted by anyone but the seller).
2) Up to 6% of the buyer’s closing costs can be paid by the seller
3) Minimum credit score of 620 required.
4) There is no income limit.
5) FHA Loans are assumable to anyone who qualifies for the loan.  (An asset when selling)
6) Co-Borrower is allowed.
7) Loan limits for Portland area are $418,750.

When you look over these requirements you’ll see this is one of the easiest loans for a purchaser to qualify for and still get a good interest rate.  Shop around with different lenders and find one who handles FHA loans.  I know Umpqua Bank does and I love them because they are local.  I know they do because I learned a lot of this at a refresher course for Realtors at their Tigard branch just last week. 

Sunday we all heard on the news about the Feds taking over Freddie Mac and Fannie Mae.  I see this as a giant step toward boosting the sagging real estate market.  This article by Kimbrough Gray which I found in “Broker Agent News” gives a better explanation that I ever could.  Hope you find it as interesting as I did:
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So on Friday it was leaked that the government is taking over Freddie Mac and Fannie Mae.  On Sunday it was official.  Freddie Mac and Fannie Mae have now been taken over by the federal government.  But what does it mean for the real estate market, mortgage interest rates, and the US economy.

First let’s look at what it means for mortgage rates.  I would expect that the government takeover will result in lower mortgage rates, possibly a full point lower.  Why?  Basically the Fed has been struggling to lower mortgage rates for the last year in an attempt to assist the troubled real estate market.  The Fed has lowered prime rates several times in an attempt to pull down mortgage interest rates.  In spite of this over the last 8 months mortgage interest rates have mostly risen.  Now with full control of Freddie Mac and Fannie Mae (which provides insurance for most mortgages in the US) they will have much more control over the mortgage market and mortgage rates.  As long as their objective stays the same, we can expect lower rates. 

What does the takeover say about the current situation in the real estate market?  This should have been obvious from all the events that preceded this but the takeover shows that the real estate market is in serious trouble.  The federal government doesn’t just take over large companies on a whim, especially an administration with a Republican president that believes strongly in free markets.  This is not simply a government takeover.  This is the largest takeover in US history.  Basically the takeover happened because it was believed if nothing was done we were headed for economic catastrophe. 

How is this going to effect the real estate market?  Although the takeover is a bad sign about our current situation it should have a positive effect on the real estate markets moving forward.  First lowering mortgage interest rates should be quite a boon for the real estate market.  Lowering rates lowers the effective cost of a house.  And historically lowering rates has a positive effect on real estate values. 

Additionally, if the Fed is smart they will reduce some of the mortgage restrictions Freddie Mac and Fannie Mae have created in the last year.  While I would not like to see the mortgage market return to the free-wheeling lending of a few years ago, some of the current rules are bizarrely restrictive.  The lending environment typically works like a pendulum moving from one extreme to another.  Currently lending restrictions are not just stricter than what we saw during the real estate boom a few years ago but they are more restrictive than anything we have seen in the last 15 - 20 years.  Hopefully a federally controlled Fannie Mae and Freddie Mac can help return us to normal as far as lending restrictions.

Lastly the government takeover could put taxpayers in the lurch for billions in loan losses.  In the short term the government is going to have to infuse money into Freddie Mac and Fannie Mae.  They have been losing money for quite some time and that is not going to change overnight.  The government will have to around 20 to 30 billion into Fannie Mae and Freddie Mac to get them back to financial solvency.

Does this mean the federal government is insane?  It depends on how you look at the issue.  While taking over Fannie Mae and Freddie Mac will be very costly for the government and taxpayers, allowing them to fail could have led the US economy into a depression.  In a depression those that keep their jobs have to make up for all the lost tax revenues for the large number of people that lose their jobs.  So taxpayers could have been in a lurch if the Feds had decided to stay on the sidelines.  So in summary the federal government found itself in a tight spot and decided to bet that they can fix the real estate market.  We will find out if they were correct over the next several months.

If you are over 62 and are a homeowner with a lot of equity in your house, you may consider refinancing into a Reverse Mortgage.  I had lunch with my friend, John Heene, of Directors Mortgage the other day and he explained this often misunderstood form of financing to me.  These mortgages continue to grow in popularity because it enables a homeowner to withdraw the equity in his house and use the cash proceeds for any purpose..travel, pay off debts, help their kids, make a luxury purchase or just live more comfortably.  John recommends that the borrower speaks to a financial advisor, as you would with any major decision like this.

The borrower retains title to the home throughout the life of the reverse mortgage.  He cannot be forced out of his home as long as he is paying the taxes and insurance.  It is only when the last borrower moves out of the house that the loan must be repaid.  At this point many times the borrower or his/her heirs choose to sell the home to repay the loan and preserve the remaining equity for the benefit of the borrower or his/her estate.  The borrower is in control of the home and retains title, not the bank or the lender.

To me a huge benefit is that a reverse mortgage allows a senior to stay in the home they love.  Many people do choose to move to a smaller home when they retire, but for others this may seem like a daunting task.  Seniors need to analyse their situation and the cost involved in moving (real estate commission of 6%, moving costs, etc.) and decide what would work best for them.

Two of the great safeguards for reverse mortgages are that they are structured so the borrower or his estate can never owe more than the value of the home upon repayment.  In addition, the HECM products are insured by the Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Urban Development (HUD).

Just a few more years and I will qualify for this!

What is a Short Sale? It’s an arrangement between the owner of a house and the bank holding his home loan to accept an offer for less than what the owner owes on the house. The deficiency (shortage) is the difference between the amount owed on the loan and what the bank collects at the time of the sale.

A Short Sale is not a Foreclosure. In a foreclosure the owner falls several payments behind on their house payments, the bank repossesses it and sells it. In a Foreclosure, almost always the bank will pursue the homeowner for the shortage. And they never stop trying to collect!

How does a seller get into a Short Sale situation? An owner, for various financial reasons, needs to sell his house. He finds he owes more on his house than he can sell it for. He takes the best offer he received and contacts his bank, requesting them to settle for less than he owes (the amount of the best purchase offer from a buyer).

All banks have their own procedures for approving and processing Short Sales, so you need to call and ask your bank for directions on how to proceed. But please know that nothing you discuss on the phone with a bank representative is binding. As with all real estate, it has to be in writing to be binding. In some cases the bank will allow the property to sell at the lower price, but considers the shortage as a ‘loan’ and will require the seller to pay back the amount. It depends on the bank and the agreement you can reach with them. At the very least they will report the shortage as 1099 income to the seller.  If the bank agrees to absorb the shortage and the transaction closes quickly, this will be less of a blow to your credit than a Foreclosure would be.  A Short Sale can be a slow and frustrating process, and sometimes it seems the bank is actually working against the sale! The truth is that usually a Short Sale is better for the banks than a Foreclosure. And their main goal, after all, is to try to get as much of their money back as possible.

Remember that before a bank can approve a Short Sale you must have an offer in writing. At that point you contact the bank and they send you a detailed packet to complete. The packet can contain an application, hardship letter, financial statements, tax returns, pay stubs, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender. You will generally not receive approval for 1-4 weeks, and many times they also change the terms. In some cases it all works and the transaction closes, but in other cases the buyer becomes frustrated with the change in terms and the delays in closing and he goes looking for something easier.

If you are considering selling your house and the market value is less than your mortgage amount, read some good information about Short Sales and then contact a Realtor who has done this before. If you are a buyer looking at a house that is listed as a Short Sale, it is helpful if your Realtor has experience in handling Short Sales. It can be cumbersome process but easier if you are well informed and know what to expect. Don’t wait until you are missing payments to consider a Short Sale as this will negatively impact your credit. All you have to do is show that your house can’t be sold for what you owe.