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How Does a Foreclosure or Short Sale Affect Your Credit Score?

A Short Sale May Have Less of an Effect on Your Credit Score

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There are several ways a foreclosure or short sale affects your credit score. If done correctly, a short sale can have less of an affect on your credit score than a foreclosure.

Here are several ways a foreclosure affects your credit score:
  • The late payments that precede a foreclosure have a big impact on your credit score.
  • FICO, the agency which calculates credit scores, guards their scoring system carefully, but it is estimated that a foreclosure can drop your score anywhere from 175 – 300 points.
  • The foreclosure will remain on your credit report for ten years.

If possible, consider alternatives to a foreclosure, such as a short sale or deed-in-lieu of foreclosure.

A short sale can have less of an effect on your credit score than a foreclosure if you do the following:
  • Work with your lender to negotiate the short sale without missing any of your payments.
  • As part of the negotiation, ask your lender to report the sale as “paid in full.”

Although possible, a short sale that has a minimal effect on your credit score is difficult to accomplish. Your lender must approve the short sale, which means you have to send them a packet of information about your financials.

Your lender may not provide a quick approval of the short sale, so if you are strapped for cash, it may be difficult to avoid missing payments during this process. You lender can also decide that you do not qualify for the short sale, in which case you must decide if you want to try to keep the house, or let it go to foreclosure.

Additional resources on how foreclosures and short sales affect your credit score:
  • The Distressed Property Institute offers a certification class for realtors who want to specialize in distressed properties. Buried in their material is this document on foreclosure vs. short sale. This piece provides additional details on how soon you may be able to qualify for a new loan to purchase a home after going through a short sale or foreclosure.
In addition, the two articles below provide fabulous, detailed information on foreclosures and short sales and how they affect your credit score:

I would also suggest you order the free DVD Avoiding Foreclosure, offered by the National Foundation For Credit Counseling.

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