A recent study by FICO shows exactly what various credit faux pas cost you in terms of credit scoring, and how long it takes to recover from a mis-step. The bad news is that the effects of late mortgage payments are substantial. But for people with bad credit, mortgage lenders won't be coming down on you quite as hard as they would people with good credit. I'll explain.

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Mortgage late payments hit your credit score hard!

The effect of a mortgage late payment on someone with bad credit is less because they simply have less to lose. And they recover faster because they simply have less far to go to get back to where they were before. A consumer with a 780 credit score (this person probably has a halo, too!) would see a drop of about 100 points to 670-690 and it would take about three years to recover back to 780. While the chap with a 680 score sees a 60-80 point drop and gets back to where he was after only 9 months of good behavior.

Interestingly, being 90 days late isn't much worse than being 30 days late. Both lead to bad credit. But mortgage lenders underwriting a loan application will likely be a great deal more unhinged by 90 day late payments than 30 day ones.

What about HAMP?

One of the side effects of applying for Home Affordable Modification Program help is that most lenders don't consider you to be at risk of imminent default until you are late on your mortgage. In fact, homeowner after homeowner has told of mortgage servicers directing them to skip a couple of month's payments to potentially qualify for the program. This results iis program applicants have their credit scores torpedoed.

What about HAFA?

The Home Affordable Foreclosure Alternative program does little to save homeowner credit scores. In the study, it was found that there was no appreciable difference in the effects of a foreclosure or a short sale or deed-in-lieu. So if you are going to lose your home no matter what, you may be better served by remaining in it as long as you can and saving up as much as you can during that time.

A word from the trenches

While the typical FICO profile studied took 5 to 7 years to recover from bankruptcy, I personally saw many mortgage applicants who recovered much faster. The charastics of these atypical applicants were as follows:

1. They did not let their payments go prior to filing for bankruptcy protection. Much of the impact of bankruptcy comes from the months of missed payments that often precede filing.

2. They reinstated accounts like mortgages and auto loans and continued to pay these on time. I saw applicnts with scores in the 700s a few months after filing for bankruptcy protection.

Why is this important? Because FHA allows you to get a mortgage two years after a bankruptcy filing if your credit has rebounded, and as soon as 12 months following a bankruptcy in some cases. Anything you can do to salvage your score helps you there.

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