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

A short sale may be better for your score than a foreclosure.

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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 a negative impact on your credit score than a foreclosure.

Ways a Foreclosure Affects Your Credit Score

A foreclosure stays on your credit report for a long time. Here are some of the ways it impact you.

  • 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. According to 2011 research from FICO, credit scores can drop anywhere from 85 to 160 points, depending on your starting credit score.
  • The foreclosure will remain on your credit report for seven years.

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

A Short Sale Can Have Less of an Impact

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

One way to lessen the impact is to 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.” This can reduce the severity of how it shows up on your credit score.

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

The Distressed Property Institute offers a certification class for realtors who want to specialize in distressed properties. Available from the institute's materials is this document on foreclosure vs. short sale. It 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.

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